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Schlumberger N.V. (NYSE:SLB)
Q1 2018 Earnings Conference Call
April 20, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to Schlumberger's earnings conference call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. The instructions will be given at that time. If you should require assistance during the call, please press * and then 0. As a reminder, this conference is being recorded. I'd now like to turn the conference over to our host, Vice President, Investor Relations, Mr. Simon Farrant. Please go ahead, sir.

Simon Farrant -- Vice President, Investor Relations

Good morning. Good afternoon. Welcome to the Schlumberger Limited first quarter 2019 earnings call. Today's call is being hosted from Moscow, Russia following a 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, New Ventures.

We will, as usual, first go through our prepared remarks, after which, we'll open for questions. For today's agenda, Simon will first present comments on our first quarter financial performance before Patrick reviews our results by geography. Paal will close our remarks with a discussion about technology portfolios and our updated view of the industry macro.

However, before we begin, I'd like to remind the participants that some of the statements we'll be making today are forward looking. These messages involve risks and uncertainties that could cause our results to differ materially from those rejected 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 and reconciliations for the most directly comparable GAAP financial measures can be found in our first quarter press release, which is on our website.

Now, I'll hand the call over to Simon Ayat.

Simon Ayat -- Chief Financial Officer

Thank you, Simon. Ladies and gentlemen, thank you for participating in this conference call. First quarter earnings per share excluding charges and credits was $0.38. This represents a decrease of $0.10 sequentially and an increase of $0.13 when compared to the same quarter last year. Our first quarter revenue of $7.8 billion decreased 4% sequentially, largely driven by seasonal declines. Pre-tax operating margin decreased by 169 basis points to 12%.

Highlights by product group were as follows. First quarter Reservoir Characterization revenue of $1.6 billion decreased 5% sequentially due to a seasonal decline in land activity and lower SIS software and monthly client license sales following the usual but muted impact of year end. Margins decreased 224 basis points to 19.7%, driven by the lower contribution from wireline and SIS software sales.

Drilling Group revenue of $2.1 billion decreased 2% sequentially, while margins decreased 85 basis points to 13.8%. A strong activity in North America was more than offset by seasonal lower drilling activity in the international areas.

Production Group revenue $3 billion decreased 4% sequentially and margins fell like 291 basis points to 7.3%. These results were primarily driven by lower activity in the international markets and transient headwinds that impacted the North America hydraulic fracturing market.

Cameron Group, revenue of $1.3 billion, decreased 7% sequentially. This decrease was largely driven by OneSubsea as a result of declining project volumes. Each of Cameron's other product lines also contributed to the decline. Margin decreased 169 basis points to 12.7%, reflecting the lower revenue during the quarter. The book to bill ratio for the Cameron long cycle basis was 0.8. However, the book to bill ratio for the entire group is now at 1.0, reflecting an increasing backlog of the short cycle businesses.

Now, turning to Schlumberger as a whole -- the effective tax rate, excluding charges and credits was approximately 18% in the first quarter compared to 19% in the previous quarter. Looking forward, the ETR will be sensitive to the geographic mix of earnings between North America and the rest of the world. With the continued recovery in North America, we anticipate that the ETR will increase next quarter and over the course of the year.

We generated $568 million of cashflow from operations. This is despite the consumption of working capital that we typically experience during Q1, which is driven by the annual payments associated with employee compensation. Our net debt increased $800 million during the quarter to $13.9 billion. We ended the quarter with total cash and investments of $4.2 billion.

During the quarter, we spent $97 million to repurchase 1.4 million shares at an average price of $69.79. Other significant liquidity events during the quarter included CapEx of approximately $450 million and capitalized costs relating to SBM projects of $240 million. During the quarter, we also made $692 million of dividend payments. Full-year 2018 CapEx, excluding SBM and multi-client investments is still expected to be approximately $2 billion.

Now, I will turn the conference call over to Patrick.

Patrick Schorn -- Executive Vice President, New Ventures

Thank you, Simon and good morning, everyone. Revenue in the first quarter of 2018 fell 4% sequentially, with pre-tax operating income decreasing by 16%. In North America, drilling and project activity continued to grow, but our results were negatively impacted by lower than expected pressure pumping activity together with pricing pressure and supply chain inefficiencies.

In the international markets, the underlying business performed as expected for all product lines, including the expected transitory headwinds from the seasonal wave of slowdowns in the Northern Hemisphere and the plant project start-up costs associated with recent contract winds.

Looking closer at our North America results, revenue increased 1% sequentially with improved land revenue in the US and Canada and stronger offshore activity in the Gulf of Mexico and Alaska, more than upsetting the seasonal drop in WesternGeco multi-client sales from the US Gulf of Mexico.

Cameron Group revenue was lower following the year-end product sales of Surface Systems and Valves & Measurement. In short in North America, we experienced a slow start to the quarter due to freezing weather and as many shale oil operators took a conservative approach to pick up activity after the holidays.

However, with oil prices stabilizing well above $60.00, both drilling and pressure pumping activity started to ramp up in the second half of the quarter and showed healthy first quarter exit rates. In this market environment, our North America land revenue, excluding Cameron, grew 4% year over year, matching the increase in rate count.

Growth was driven by higher drilling and project activity with a ramp-up of winter drilling activity in Western Canada and continued high-demand for rotary steerable systems to drill longer laterals with our two-fleet utilization increasing 24% sequentially.

In OneStim, we continued to add fleet, but less than planned, due to market over-capacity that led to lower utilization, inefficiencies and softer pricing. These headwinds were compounded by inefficiencies and increases costs associated with rail logistical issues impacting the supply sent in parts of our operations.

Despite these disruptions and transformation of our logistics control and the vertical integration of our own sand supply successfully ensured strong service quality and overall business continuity along our operations, which was recognized by our customer base. During the first quarter, we continued to actively deploy our spare fracturing equipment, including the first spread from our newly acquired fleet. And the operational performance of these new crews has already reached the standard of our existing pressure-pumping business.

Let's now turn to the international areas. Starting with Latin America, revenue decreased 16% sequentially. This was due to lower hydraulic fracturing stage count in Argentina, reduced activity in Brazil as we mobilized for new offshore projects for several international operators and as our cash-based operations in Venezuela declined further.

On the positive side, revenue in Mexico grew as onshore workover activity increased and as we continued to monetize our newly acquired WesternGeco multi-client seismic library on the back of another bid round for new offshore acreage in Mexico during the quarter.

Seasonally lower Cameron Group revenue also contributed to the decrease. In Europe, CIS, and Africa, revenue decreased 6% sequentially, primarily due to seasonal activity declines in Russia and the Caspian Sea region that impacted all product lines. Activity was seasonably lower as well in the UK and Continental Europe geomarket, where operations were hit by weather delays and changes in customer drilling plans. In addition, SIS software license and WesternGeco multi-client license sales were generally weaker sequentially despite positive multi-client license sales in the Scandinavia geomarket related to licensed sales on the Norwegian continental shelf.

Revenue from our Africa geomarkets were in line with our expectations. A solid performance through onshore projects in Libya and Chad, offset start-up delays for several integrated projects in Gabon, Nigeria, and Ghana. Cameron Group revenue during the quarter was higher particularly in the Russia and Central Asia geomarkets.

Turning next to the Middle East and Asia, revenue decreased 4% sequentially, driven by pricing pressure, lower drilling, and hydraulic fracturing activity on land in the Middle East, which was partially offset by stronger drilling activity in Iraq, improved testing services revenue in Qatar and Egypt, and solid progress on a long-term service facility project in the region.

The move toward more performance-based work in the Middle East was further reimbursed during the first quarter, as we won another IDS contract in Saudi Arabia for 70 lump sum turnkey wells which comes in addition to the 274 wells awarded previously, for which we mobilized the first two rigs at the end of the first quarter.

In Asia, first quarter revenue came in above our expectations, driven by accelerated sales, processing equipment in Thailand and project start-ups in India, competition encroachment in Australia and increased activity on land in China. Cameron Group are slightly lower, with growth in Asia offset by seasonably lower revenue in the Middle East.

With that, let me pass the call over to Paal.

Paal Kibsgaard -- Chairman and Chief Executive Officer 

Thank you and good morning, everyone. As described by Simon and Patrick, our first quarter activity was generally in line with expectations with solid year over year growth in Europe, Russia and the Middle East, positive recovery signs in Asia, continued subdued activity in Africa and Latin America, while transient market weakness impacted our business in North American land.

During the quarter, we absorbed mobilization and reactivation costs associated with new project start-ups and we also started to reposition our spare capacity in the international market as we look to maximize our ability to capture profitable growth in the coming quarters and into 2019.

So, with one quarter of the emerging quarter behind us, let me give you our latest views on how the global oil market, E&P investments, and oil field activity will unfold over the coming year.

Looking first at the global oil market, the absence of the normal seasonal soft fields in the first quarter clearly demonstrate that supply and demand is not in balance, which combined with increased geopolitical risk is what has driven oil prices up by more than 10% over the past month.

Global crude stocks and days forward coverage is already well below the five-year average and bigger growth is expected from the current stock levels in the coming quarters. These anticipated stock draws are underpinned by a continued strong outlook for oil demand with global growth continuing to be projected between 1.5 million and 1.8 million per day in both 2018 and 2019. There's a current US-China trade war tension not expected to escalate into lower global growth at this stage.

On the supply side, after three consecutive years of dramatic under-investment in global E&P activity, the worldwide production base has not -- the expected signs of weakening with noticeable year over year production declines appearing in several countries, such as Angola, Mexico, Malaysia, China, and Indonesia.

This trend is expected to spread and accelerate in impact as the level of new long -- added from prior year investment continues to fade into 2019. With Libya and Nigeria producing at near full capacity and the potential of new sanctions against Iran, the only major sources of short-term supply growth to address the global production decline and strong worldwide demand growth are the UAE, Russia, and the US land shale operators.

At present, the collective spare capacity of the three core OPEC countries is only in the range of 3 million barrels per day. There are also emerging questions around whether the very bullish production growth outlook for US shale oil can be fully met. The industry is starting to face challenges linked to well to well interference as more infield drilling takes shape. Lower production per well as drilling increasingly steps out from tier one acreage.

As operators look to overcome growing infrastructure constraints and as refineries approach current processing capacities for light oil. In spite of these clear signs of a tightening oil market, there has been no upwards revision to 2018 E&P spending, with North America and international upstream investment still expected to grow in the range of 20% and 5% respectively.

Based on these investment levels and the current supply, we believe it is increasingly likely that the industry will face growing supply challenges over the coming years and that a significant increase in global EMP investment will be required to minimize the impending production deficit.

The key indicator for this evolving trend continues to be global oil inventory levels, not US inventories alone. Significant weekly swings in import and export levels often mars the actual evolution of the underlying US supply and demand.

Turning next to the oil field services market, we expect drilling activity in North America land to continue to grow in volume and complexity in the coming quarters, as more of our customers move toward longer horizontal laterals. In this market, we continue to be sold out of our differentiated, directional, and drill technologies as we, again, posted strong growth in the first quarter and still command a stronger pricing premium for our services.

In addition to our down hole drilling technologies, we are now ready to introduce into the US land markets the first complete version of our rig of the future, as well as our new DELFI-enabled drilling software platform that covers the complete drilling process, all the way from well design and planning to well set execution and total system optimization.

We are fully focused on the successful introduction of our new and unique well construction offerings into the US land market, as we aim to provide a step change in drilling performance to our customers.

Next, we also see continued growth throughout 2018 in our North America land pressure pumping business, driven by strong underlying activity as well as market share gains, as we deployed a further 1 million horsepower over the course of 2018.

With the activity and pricing softness seen in the first quarter, the number of companies added significant new capacity, we expect the market to remain close to being balanced in the coming quarters from an equipment capacity standpoint.

This means that frack pricing will actually be rangebound and driven by short-term or local supply/demand variations and that any upwards pricing movement will likely be limited to passing on people and supply chain cost inflation.

In this environment, we have four differentiating factors that will ensure that our frack business meets our financial return expectations. The superior service quality we deliver to our customers, the technology driven efficiency improvements we create at the environment fleet level, the scale advantage we have as we deploy our new capacity, and the increasing benefits we are generating from our vertical integrations investment program.

In the international markets, tendering activity remains high and continues to be very competitive, with a clear move toward performance-based contracts for many of our customers. We clearly welcome this trend as it offers strong -- and provides us with a clear financial upside as we leverage our technology systems, people expertise, execution capabilities to start new performance benchmarks.

In terms of pricing for basic stand-alone products and services, we have yet to see an inflection point. There is still sufficient capacity in the markets. However, as the early sides of improving rig rates for land rigs, standard water jackups, and selected ultra deep water rigs continues to evolve over the coming quarters, the value proposition of our high-end products and services become increasingly attractive, compared to the basic performance offered by our competitors. This is where we first expect to see pricing fractions in the international markets.

In terms of geographical trends, our outlook for Russia, the Middle East, and the North Sea remain solid and in line with our expectations for the year, while the emerging upside we are seeing in Asia will likely be offset by a slower growth trajectory in Africa and Latin America, where the start of the activity recovery now seems to be pushed out to the second half of 2018.

So, overall, the international markets are evolving longer on expectations for the year and we are excited about the outlook for Schlumberger. We are ready and primed to deliver superior growth, financial returns, and free cashflow in the coming years, by building on the broadest technology offering and expertise in the industry, our unmatched scale and operational efficiencies, strong capital discipline, and a clear desire to provide industrial leading cash returns to our shareholders.

Before we open up for questions, I would like to take the opportunity to thank the more than 100,000 women and men that make up the Schlumberger workforce. You are the best team in the industry and I want to thank you for your unwavering commitment to your jobs, to our customers and to the company over the past few years, where we together have navigated through very tough market conditions.

Now, things are again looking brighter for the industry and for Schlumberger and I look forward to facing the new and more energizing challenges of the growth market together with all of you. Thank you, we will now open up for questions.

Questions and Answers:

Operator

Ladies and gentlemen, if you do wish to ask a question, please press * and then 1 on your touchstone phone. You'll hear a tone indicating you've been placed in queue and you may remove yourself from the queue at anytime by pressing the # key. If you're using a speakerphone, please pick up the handset first. Once again, if you have a question, press *1 at this time.

Our first question here will come from Ken Sill with SunTrust Robinson.

Ken Sill -- SunTrust Robinson Humphrey -- Analyst

Yeah, can you hear me? Hello?

Operator

Your line is open.

Ken Sill -- SunTrust Robinson Humphrey -- Analyst

Okay. For a minute there, I thought I dropped the call. I was surprised to hear my name first. This is a good quarter in a tough environment here. One of my first questions is on pressure pumping. You're planning to put 1 million horsepower out. How much did you actually deploy in Q1?

Paal Kibsgaard -- Chairman and Chief Executive Officer 

Well, I'm not going to go into the details of exactly how much we deployed. We continue to deploy. I will say that we deployed less than what we planned to, mainly because the overall softness we experienced in the market. I think the overall stage count growth market wide was a bit lower than expected and in addition to that, a number of other companies added fairly significant capacity to the market. This had an impact on softening pricing and also it impacted utilization.

So, we introduced somewhat lower -- a lower number of fleet in the first quarter and it was more backend loaded, but we are back on our plan rate of introduction and now as we enter Q2 and our plan is still to deploy the full 1 million horsepower that we acquired during the course of 2018.

Ken Sill -- SunTrust Robinson Humphrey -- Analyst

Okay. Step into a big picture question -- you're very optimistic about the outlook. It makes a lot of sense given what we're seeing in inventories. Are you concerned with the Wall Street estimates on timing of the recovery? It seems like international is going to remain slow, North America up 20%. I think some estimates are higher than that. It doesn't seem like people are moving to raise their CapEx budgets very significantly. I think the trend is very positive, but do you have any concerns about the timing of the growth of activity.

Paal Kibsgaard -- Chairman and Chief Executive Officer 

Well from operational planning and execution from the Schlumberger side, international is unfolding this year as we were expecting. The rate of increase in investment levels is, as you know, significantly lower than what we see in North America, which was expected. Even with the plus-minus 5% increase in investment, we can generate, I think, quite reasonable earnings growth out of that, mainly because we have a much higher market share internationally. Our margins are generally higher and our ability to generate incremental is also much higher internationally than in North America. Even though there is a four to one ratio in investment growth levels.

Our ability to generate earnings, based on that I'm quite positive on what we can generate growth rates, even in 2018. If you ask me if the investment levels in international markets is sufficient, I would say no, it isn't. So, from a supply ability, I would be concerned whether the international market and the producers there are going to be able to produce sufficient to meet the growth and demand. There's little I can do for that. I would just say that international for us is unfolding as expected and I think there's only upside beyond where we are today going forward.

Ken Sill -- SunTrust Robinson Humphrey -- Analyst

Thank you.

Paal Kibsgaard -- Chairman and Chief Executive Officer 

Thank you.

Operator

Our next question will come from the line of James West with Evercore ISI. Please go ahead.

James West -- Evercore ISI -- Managing Director

Thanks. Paal, good early evening to you. Paal, I guess first off, I wanted to ask about the -- you had your board meetings in Russia, in Moscow this week. You obviously are still pursuing a transaction there with Eurasia. Could you maybe give us some color around what you and the board saw this week, what you were doing. Similar to other major board meetings you had in places like Saudi, you picked Moscow for a reason. I'd love to hear that reason and what you guys are up to in that market given that it's a very, very large oil field service market.

Paal Kibsgaard -- Chairman and Chief Executive Officer 

Thanks, James. As you know, our board is very much engaged in our business. We dedicate one board meeting a year to go out into our field operations and engage with our employees, with the selected customers and also industry experts in the various regions throughout the world. As you know, if you were in Saudi Arabia last year, I had a great visit there.

If you look at the largest parts of our business, it is basically between Saudi Arabia, Russia, and the US. So, the reason for picking Russia this year is that it is a huge part of our business. It is a business that has shown very good growth and strength over the past three or four years. It was something that the board wanted to see up close a little bit more.

So, this week, in addition to the normal board proceedings, the board had the opportunity to interact with a number of selected customers and partners. We engaged with some of the Russian oil industry experts. Also, the board had the opportunity to meet some of our 11,000 Russian employees. It's been a very productive week. We have provided the board with a broad industry and business uptake for Russia. We've also detailed our further investment plans in the country.

As to the EDC transaction, Simon, do you want to comment briefly on where we stand on that?

Simon Ayat -- Chief Financial Officer

Yeah, let me give a quick update. Basically, since announcing the deal with the EDC shareholders, we've been discussing with respective authorities all aspects of the transactions, including the size of our participation and the structure of the entity acquiring this thing.

As a result, we are very happy to say that we were able to satisfy and address all the concerns raised by the different respective authorities. What is more important that our objective of the deal remain unchanged, which is to deliver the best and most efficient operation to all our clients through integration and deployment of technology. Schlumberger would remain the driver behind the operations of EDC as and when the transaction closes.

Paal Kibsgaard -- Chairman and Chief Executive Officer 

So, James, as to if and when it closes, there's nothing much more we can say than this, other than we've had very good engagement with the Russian authorities. The file is now with them. We need to give them time to do their job. We're at their disposal if there's any further follow-up that is required.

James West -- Evercore ISI -- Managing Director

Okay, fair enough. Thanks, Paal. Thanks, Simon. Then a follow-up for me, Paal, on the international side, you announced a number of major key contract awards last quarter and this quarter, but it seems to me there's a lot of stuff going on in the background that has yet to be announced as well as this international recovery really takes hold and gains momentum and understanding that spending activities this year is going to lag the North American spending increase. It seems to me like heading into '19, we're looking at a pretty big inflection point for international. Is that a fair comment?

Paal Kibsgaard -- Chairman and Chief Executive Officer 

I think that is a fair comment. There is, as you know, significant tendering activity presently. What we are excited about is that it's clear that these tenders are shifting toward performance-based contracts, which means that even if they are quite competitive at bid, we have a fairly significant financial upside by being able to execute and set new performance standards on these activities.

So, I would say activity we expect to continue to ramp during the year, very solid performance and outlook still in the Middle East, Russia, North Sea. Asia is surprising a bit to the upside and we are driving a little bit further in Africa and Latin America. We expect that to start increasing as well in the second part of the year. I agree with you. I think the outlook for international is strengthening as we go through this year as we go through even stronger in 2019.

James West -- Evercore ISI -- Managing Director

Perfect. Thanks, Paal.

Paal Kibsgaard -- Chairman and Chief Executive Officer 

Thank you, James.

Operator

Our next question comes from the line of Angie Sedita with UBS. Please go ahead.

Angie Sedita -- UBS -- Managing Director

Thanks. Good evening, guys. So, Paal, a little bit further on the international side, you touched on it on your prepared remarks on the potential for pricing, maybe late 2018 into 2019 maybe a little color there. Then specifically, you highlighted your obvious strengths on the technology side as far as deep water. Maybe you can go into that a little bit further.

Paal Kibsgaard -- Chairman and Chief Executive Officer 

Yeah. In terms of pricing, as I mentioned in the prepared remarks, no inflection point yet when you look at basic products and services, but again, the shift toward performance contracts will allow us to increase our effective pricing by performing well in these projects. I think we are very well set up to do that.

The other point which I wanted to mention as well is that as the emerging science of the rig rates continue to evolve in positive directions and we've seen some encouraging signs in certain land markets, for sure in shallow water jackups and even in selected ultra deep water environments, so when the rig rate starts to come up, the value proposition of our high-end technology and services and the value of service quality and execution is going to quickly become increasingly attractive when compared to the basic performance of our competitors.

So, I think this is where we expect to see pricing to come first. I think it's easy to accept that this will start to take shape in the second half of this year.

Angie Sedita -- UBS -- Managing Director

Okay, very helpful. And then going back to Russia and EDC, what do you think Eurasia drilling would bring to Schlumberger? What's the opportunity set by owning that company or a portion of that company and the opportunities overall in Russia as we go into 2019?

Paal Kibsgaard -- Chairman and Chief Executive Officer 

Well, the opportunity around Eurasia drilling for us has always been the fact that it would allow us firstly to bring our latest total drilling technology systems to the Russia land market. It is a very drilling-intensive market. Today, there is no real integration happening. We have a very strong purpose-built downhome offering in Russia, partly through a combination of acquisitions we've made and also organic R&D investments made within the Russia R&D organization.

When you add that to the rig of the future, where we are working on creating a winterized rig of the future version for an introduction in Russia land as well as the drilling software package, there's huge drilling performance upside in Western Siberia by introductions of both software and the rig. This is the whole excitement we have around the Eurasia transaction. It is a very well-run company, a company we know very well. We've partnered and worked with them for a number of years, but being present on the ownership side, that will allow us to take a stronger position in driving the technology direction and I think that is what creates the excitement.

Angie Sedita -- UBS -- Managing Director

Thanks. I'll turn it over.

Paal Kibsgaard -- Chairman and Chief Executive Officer 

Thank you, Angie.

Operator

Our next question will come from the line of Scott Gruber with Citigroup. Please go ahead.

Scott Gruber -- Citigroup -- Analyst

I have a question on SPM. You're slowing project sanctioning, as you discussed last quarter given the business outlook is improving here. I'm curious about the free cash conversion of SPM when you're just spending a maintenance CapEx. CapEx as a percent of sales is still above your base business given the nature of the business. How should we think about the free cash conversion out of net income for that business when you're just spending in maintenance mode? Is it accretive to the conversion target for the company or is it diluted?

Paal Kibsgaard -- Chairman and Chief Executive Officer 

Patrick, you want to comment on that?

Patrick Schorn -- Executive Vice President, New Ventures

Yeah, maybe I think it's a little bit more general thought. As you're well aware, during the downturn, we had a significant growth initiative around SPM. This has been a growth avenue that allowed us to get the best returns on our technology. We also announced as we saw the cycle change that we were putting an end to our very strong countercyclical investment program. So, with that becomes a very strong discipline around new projects that we are investing in and obviously also with the CapEx we invest in the ongoing projects.

This is always a bit of a balance that you're trying to strike between the IBT that you're generating today and the long-term value that you're generating in these types of assets. So, what we're going to do going forward is that we maintained a very disciplined investment and that we are also looking at monetizing some of these assets, which obviously is one of the ways to start making a significant dent in the cash flow of these assets.

We are looking today at monetizing some of our assets during the term of 2018, but we want to make sure we do this at the right time. the most opportune time is when we are having derisked some of these projects and that we have sufficient value proven that we can obviously then also sell this or go along.

So, we are fully expecting to engage with interesting parties here over the next quarters. We actually are seeing the interest built in this transaction. That is maybe the best that I can give a bit of color around the question that you're asking.

Scott Gruber -- Citigroup -- Analyst

Got it. Patrick, maybe you could update us on progress on Palliser and the projects in Nigeria and Argentina?

Patrick Schorn -- Executive Vice President, New Ventures

Yes, I certainly can. So, we started operation at the end of last year. We concluded a variety of operations, obviously, the production operation, we started work over rules, so we started drilling new wealth. We've had up to four rigs drilling simultaneously up in Canada on the Torxen Project. We've had around 56 wells to date. I think the key thing to remember is that our investment is truly focused on increasing the oil production from these assets.

So, we'll continue to look up and put in production these new wells in the months to come and once breakup finishes, we expect to start drilling again in the second half of this year. Quite frankly, we're quite pleased with the progress the team has made in Canada in a very short time in turning this asset into a very focused organization on oil.

When it comes to Nigeria, there, we are going through a lot of fee type of work. We're working closely with our partners. Here, you would have to think about detailed design around the FPSO conversions, the topsides that are needing to be prepared. Everything there is on track. We're looking to an FID there later in the year. So, from that, that gives you a bit of an idea of where we are in Nigeria.

The last one, Argentina is doing well. We have drilled a number of wells. The ones that we have at this moment are producing well, very close to our P10 type of expectation. So, things are looking up when it comes to the performance of the individual wells. But let's be very clear as well. There is no field developed with one or two wells. So, we need to make sure that we are drilling many, many very good wells. What we're seeing right now encourages us. That obviously also helps when you're starting to think about monetization in the future.

Scott Gruber -- Citigroup -- Analyst

Great. Thank you.

Operator

Our next question here will come from Kurt Hallead with RBC. Please go ahead.

Kurt Hallead -- RBC Capital Markets -- Managing Director

Hey, hello.

Paal Kibsgaard -- Chairman and Chief Executive Officer 

Hey, Kurt.

Kurt Hallead -- RBC Capital Markets -- Managing Director

Hey, there. Hey, Paal, I was wondering if you -- I guess I'm still trying to wrap my hands around some of the dynamics that are taking place in the US frack market. You did a great job trying to walk us through some of these things. I'm not quite sure if I got a handle on it. I apologize if I'm asking the question you may have already answered and did a little stall on the update.

So, you mentioned during the first quarter you had some challenges around the industry, bringing in some new capacity. That led to some softer pricing. I heard Patrick talk about things, kind of picking up as you go into the end of the first quarter. And then some positive dynamics for the second quarter, yet couched around the prospect for incremental capacity can still creep into the system.

So, where do we stand? Is demand still exceeding available supply in the frack business? Are we now at a point where we're going to be stuck in neutral and companies are going to continue to put capacity into the market and crimp the pricing power as we get into the last three quarters of the year. Again, if you can give a little more color around that, that would be helpful.

Paal Kibsgaard -- Chairman and Chief Executive Officer 

That's fine. Fair enough. Yeah. So, what we said is from a supply and demand standpoint of frack equipment in Q1, I think it's pretty clear that we had over-capacity as an industry based on the available stages during the first quarter. So, we are more or less at capacity. Today, I think the market going forward when it comes to frack equipment, I think it's going to resonate around being in balance. I think you will probably have local variations in certain basins.

You might have a temporary oversupply, undersupply based on where companies introduce new capacity. But I think the fact that we are now more or less at capacity and we need to accept that we will be in that situation for the duration of this year I think is pretty clear. Given the fact that the market has been growing steadily now -- this is the second year in a row -- and also, given the fact that we have a very agile service industry and manufacturing industry is not a huge surprise that in the fully commoditized market, supply is going to match demand at some stage and I think we're basically there.

I think from a pricing standpoint, we don't expect any significant tailwinds of net defective pricing. We do expect to continue to be able to pass on additional costs associated with people, supply chain, and inflation, but beyond that, I think operating markets and profitability is going to have to be driven by how you execute.

From our standpoint, as I mention in my prepared remarks, we have four major drivers. One is the service quality and the business continuity that we are able to provide to our customers in any kind of market situation. We also have significant investments into technology that drives individual fleets' operating efficiency. As we add another 1 million horsepower over the course of 2018, that's going to give us a fairly significant scale advantage.

Also, what we see is increasing benefit from our vertical integration program, right? So, I think it's going to be a challenging market situation throughout 2018, but we have some levers that we are very much focused on, which makes me confident that we are going to be able to meet our, I would say, expectations for the investments that we make into this.

Kurt Hallead -- RBC Capital Markets -- Managing Director

That's great. Appreciate that color. That's all for me. Thanks.

Paal Kibsgaard -- Chairman and Chief Executive Officer 

Thanks.

Operator

Next question here will come from the line of James Wicklund with Credit Suisse. Please go ahead.

James Wicklund -- Credit Suisse -- Managing Director

Good morning, guys. International, I want to drill down a little bit if I could, Paal, on the performance-based contracts. You guys have been pushing this for some time. I know everybody has been a little disappointed at the uptake, but in your first lump sum turnkey project in Saudi Arabia and more to come, you finish your first well on a performance-based contract with more drilling in Gabon. The market is concerned that lump sum turnkey contracts get too competitive. You kind of addressed that saying that even though they are a bit competitive, you have the opportunity to outperform.

Can you talk a little bit about how you do that? Is this just a matter of throwing your best technology that your client themselves might not hire on a regular service basis? Can you talk about how especially with those two contracts -- and I realize they're different -- how this is going to morph over the next couple of years into a much wider performance-based business internationally?

Paal Kibsgaard -- Chairman and Chief Executive Officer 

Okay. That's a good question, James. The way we see this contract as you rightfully point out, they are competitively bid, as with anything, but with the investments we are making from an R&D standpoint, in particular into our drilling portfolio and with the ultimate focus on creating one drill as a complete revolutionary total drilling system. That's where our ability to execute and drive performance on any type of contract to a completely new level, that even though we win the contract at a very competitive pricing, we can, over the course of that contract, generate very healthy returns to the company.

So, the way we do this is, like I said, by having firstly superior individual technology building blocks. Then it's the ability to bring this together to a complete operating and planning software package, which drill plan and drill ops is going to do. This is all sitting on our DELFI digital system, which allows every application to share all the data and the information. Then on top of this, it is the domain expertise we have from the drilling and subsurface as well as our operational execution on the well side.

So, I can't really point to one thing, but the key with any kind of lump sum turnkey contract is that you improve the drilling performance over the course of the contract. Generally, well number ten is drilled significant faster than well number one.

The key with our one-drill system and the whole digital approach is that ideally, we don't want to start off with the performance of the traditional well number one. We want to start off with well number one matching the traditional performance of well number ten. If you can do that, you can move up the profitability and the gains you were making in drilling experience from the digital environment that you have deployed in all your operations around the world.

This is a major differentiator going forward as to how we can start generating very good returns even in the first wells of a program rather than well 10 or 15 as you get into the second or third year of operation. So, this is how we want to set ourselves apart. This is how we are setting ourselves apart.

Obviously, the rig is going to play an increasingly important part of how we drive performance, right? That's why we have a very strong position on rig with ADC in Saudi Arabia. This is, again, linked to our interest in EDC in Russia. Then beyond that, we are now actively introducing our rig of the future into the US land market as well. These three markets are really the main land drilling markets around the world.

Lastly, I would say that this is also why we have made an investment into board drilling. We see performance-based contracts similar to what I described on land here, also to move into shallow water. We are very happy and very excited about the partnership and investment we made in Borr drilling and we see significant opportunities on shallow water together with Borr and potential other shallow water drillers to also introduce performance-based contracts to this environment.

James Wicklund -- Credit Suisse -- Managing Director

Thank you. That's helpful. Best of luck in that. My follow-up, if I could, a couple years ago, we were talking about the transformational effort that Schlumberger was going through and on the staged basis, I know the downturn interrupted some of the plans -- can you tell us the transformational effort that was started a couple of years ago? Is that done yet? Are we getting close? What phase are we in at this point?

Paal Kibsgaard -- Chairman and Chief Executive Officer 

Thanks. That's a very good question. I would say the downturn of the past three years has had an impact on what the transformation has brought to our bottom line. It's mainly because it is very difficult to monetize efficiency in an environment where your business continues to shrink quarter after quarter.

What we have done during this period of time is that we have refinanced the investment in the transformation program and we have continued to evolve it, continued to deploy it. We in the middle of significant deployment as we speak around how we change our workflows, how we introduce new back office systems and how we basically conduct all of our internal business processes.

So, this is all progressing. I would say that going forward, the transformation is going to be a critical factor in our ability to generate the incremental margins that we have promised. I think as soon as you see us now as starting to generate a little bit of growth in the international markets and we have finished with the pricing concession, that's when I think the impact of the transformation is going to start to become very visible again. We are maintaining, for instance, our CapEx investment levels for field equipment around $2 billion this year, which is as low as it's been throughout the entire downturn.

We're doing this because a significant part of the increased activity we are going to actually going to absorb through increased asset utilization, which is just one way that we are demonstrating what the transformation can bring. So, I would still say that we are in the mid-innings of what the impact of the transformation can bring, but we have continued to advance over the investment and deployment of this so that we are very optimistic of what this is going to bring as we go forward into 2018 and 2019.

James Wicklund -- Credit Suisse -- Managing Director

Perfect. Thanks, guys. Appreciate it.

Paal Kibsgaard -- Chairman and Chief Executive Officer 

Thanks, James.

Operator

And our next question will come from the line of David Anderson with Barclays. Please go ahead.

David Anderson -- Barclays -- Analyst

Thanks. I just wanted to stick on the LSTK subject here. So, Paal, with more of the tendering activity moving toward lump sum turnkey contracts, I'm just wondering if you could help us conceptually understand how you view the difference between SPM and LSTK just in terms of the upside versus the execution risk in both types of contracts. It feels like there's more execution risk on LSTK. I was just wondering if you could talk about that, how you look at the two types and whether or not you have a preference for either one of those types of contracts.

Paal Kibsgaard -- Chairman and Chief Executive Officer 

Okay. If you think there's more execution risk on LSTK, I can debunk that pretty firmly. That is obviously not the case. The highest risk profile of any contract type that we take on is an SPM. On LSTK, the performance risk you take on there is you stipulate a fixed price for a well profile that you have seen and that you can study up front before you submit your bid. We analyzed this in great detail.

We used our global database and experience base to understand how we can drill these wells and how we can beat the curve basically. The risk you take on is basically the time it takes to drill the well because most of the drilling costs are time-based. So, the risk profile of LSTK is a small fraction of what the risk profile of what the SPM project is. Also, from a cash standpoint, LSTK is fairly close in terms of payment terms to the base business. It's about generally you get paid on complete sakes. This is very close to the payment DSO levels that we are looking at for the base business.

So, cash exposure, profitability exposure is much more limited than what you see in SPM. Again, the ability I just outlined in the previous questions there makes those extremely comfortable with taking on these types of contracts. I would say generally for all the contracts going on, we typically beat the curve and our objective going forward is to continue to beat it by a wider margin.

David Anderson -- Barclays -- Analyst

So, is it fair to say that if these contracts are bid fairly competitively that the margins, as these contracts start up in year one, are going to -- the expectation is that these are going to improve measurably by year three? Is that sort of the idea we should be thinking about, that as he's come in, maybe a little bit lower profitability today, but the idea is once you start getting these costs and these start-up costs all taken care of that the margins all start to uplift? Is that how we should be thinking about this?

Paal Kibsgaard -- Chairman and Chief Executive Officer 

Yeah, generally LSTK contracts have improved in profitability over the course of the contract. There are some mobilization costs but they are not really significant unless there are huge contracts like, for instance, the ones we are currently mobilizing for in Saudi Arabia. I would say the profitability isn't necessarily linked to the mobilization. It's more linked to the fact that your drilling, I would say, curve improves as you build more wells.

As I was saying in the earlier question, our goal and what our drilling system is going to enable us to do is to basically fast-forward on that experience curve. So, our well number one isn't going to have a traditional performance level of a classical well, number one. We want to start way down the line, which means that profitability should be much higher in knowing the early parts of these projects as we go forward, compared to what they were in the past, but still be able to improve over the course of the project. David, are you there?

David Anderson -- Barclays -- Analyst

Yes, I am. Thank you. I appreciate the answer. Thank you.

Paal Kibsgaard -- Chairman and Chief Executive Officer 

Thanks.

Operator

Our next question will come from the line of Bill Herbert with Simmons. Please go ahead.

Bill Herbert -- Simmons & Company -- Managing Director

Good morning. Paal, I'm just curious -- so, the expectation for an increase of 5% with regard to international E&P capital spending, you should do a little bit better than that based upon market share. Against that backdrop, what do you think are reasonable expectations for international incremental margins off that mid to high single-digit revenue growth for this year.

Paal Kibsgaard -- Chairman and Chief Executive Officer 

I think it's a bit too early to make a straight commitment on this because there are still some forces playing in opposite directions. There are some start-up costs. There are some repositioning costs. We've got to work through some of the pricing concessions that we have been given in recent quarters.

I still think it's too early to give you a straight commitment to what sequential incremental margins are going to be in the coming couple of quarters. We stand behind the 65% as we get into steady state growth in the international markets. We're going to require some pricing tailwind to get there, but we stand behind that. I think it's too early to say what the incremental are going to be into Q2 and Q3.

Other than that, they should steadily improve. We have very clear plans in place in obviously getting pricing fractions, leveraging performance-based contracts and then starting to fully capitalize on the sustained investments we've made in the transformation program. I think we have all the ingredients there. It's ready to be, I would say, capitalized on, but I'm not going to give you a number, say, for Q2 and Q3 as of yet.

Bill Herbert -- Simmons & Company -- Managing Director

Okay. Can we speak about the second quarter expectation here, which seems to be a more tenable premise? The street estimate is about $0.48 or thereabouts, high $0.40. You deliver $0.38. Is that a tenable proposition with regard to the realization of that earnings per share?

Paal Kibsgaard -- Chairman and Chief Executive Officer 

Bottom line, yes, I think it is. A little bit of color on that -- if you look at US land, you see solid revenue growth in both drilling and pressure pumping. We're going to work through, as usual, the Canada breakup in the second quarter. In the international market, we continue to see the trends that we saw in Q1, strong performance in Middle East, Russia, and North Sea. Asia is basically joining that list now, slight upside in Asia, but then a bit more limited growth in Africa and Latin America, right?

Assuming the softer pricing and utilization in North America land pressure pumping doesn't really carry into Q2 -- and at this stage, we don't think it will -- I would say the current EPS consensus is pretty much in line with how we see the future.

Bill Herbert -- Simmons & Company -- Managing Director

Thank you very much.

Operator

And our next question will come from the line of Byron Pope with Tudor, Pickering, Holt. Please go ahead.

Byron Pope -- Tudor, Pickering, Holt & Co. -- Managing Director

Thanks. I just have one question. Paal, you framed some of the 2018 growth drivers for Schlumberger in terms of geo markets. I was wondering at a high-level, could you do the same in terms of which groups you think lead the growth? It seems certainly that production group will be there given the frack reactivations. Can you frame at a high level how you think about the growth drivers from a group this year?

Paal Kibsgaard -- Chairman and Chief Executive Officer 

It's a bit easier to do it down to the specifics when you look at geography, right? Overall, I see very good growth potential from all four groups. You mentioned production, yes. Absolutely. I think with the investments we made in capacity and virtual integration and the way we're set up in North America land now, I expect that North America will be a strong driver for production group growth. But as well, we have a significant business globally as well, strong fracking activity in the Middle East and Argentina as well as other parts of the business that will contribute.

Drilling as well -- these lump sum turnkey contracts are key revenue and bottom line drivers. D&M is obviously, drilling and measurement, is the main driver of performance in these projects, but all the other drilling segments have a role to play in it as well. So, still a very good growth potential for drilling.

On the characterization side, our exit out of the WesternGeco acquisition business will have an impact on topline progression this year, but from a bottom line side, this should actually be quite accretive to characterization and operating margins. Both well and testing is kind of still operating around close to the bottom of their cycle mainly because their exposure to the exploration market has not seen any recovery yet, but there are some small signs of improving explorations related to drilling in 2018, which will enable them to grow as well.

On the Cameron side, we are seeing strong performance from the short cycle businesses and I think we are getting close to the trough of both the revenue and margins for the long cycle business. Again, upside there as well. It's a bit more general what I can say on the technology side, but very good growth potential in all the four groups.

Byron Pope -- Tudor, Pickering, Holt & Co. -- Managing Director

That's helpful. Thanks, Paul.

Paal Kibsgaard -- Chairman and Chief Executive Officer 

Thank you. That was the last for today. Thank you very much for participating.

Operator

Thank you. That does conclude the conference today. Thanks for your participation and for using AT&T Executive Teleconference. You may now disconnect.

Duration: 60 minutes

Call participants:

Paal Kibsgaard -- Chairman and Chief Executive Officer 

Simon Ayat -- Chief Financial Officer

Simon Farrant -- Vice President, Investor Relations

Patrick Schorn -- Executive Vice President, New Ventures

Ken Sill -- SunTrust Robinson Humphrey -- Analyst

James West -- Evercore ISI -- Managing Director

Angie Sedita -- UBS -- Managing Director

Scott Gruber -- Citigroup -- Analyst

James Wicklund -- Credit Suisse -- Managing Director

David Anderson -- Barclays -- Analyst

Bill Herbert -- Simmons & Company -- Managing Director

Byron Pope -- Tudor, Pickering, Holt & Co. -- Managing Director

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