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Schlumberger N.V. (NYSE:SLB)
Q2 2018 Earnings Conference Call
July 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. 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. If you need assistance during the call, please press * then 0. 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.

Simon Farrant -- Vice President, Investor Relations

Good morning. Good afternoon. And welcome to the Schlumberger Limited second quarter 2018 earnings call. Today's call is being hosted from Paris, France, 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'll open up for questions. For today's agenda, Simon will first relay comments on our second quarter financial performance before Patrick reviews our results by geography. Paal will close our remarks with a discussion of our technology portfolio and an 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 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 filings and other SEC filings. Our comments today may also include non-GAAP financial measures. Additional details or reconciliations to the most directly comparable GAAP financial measures can be found in our second 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 too in the Q&A period in order to allow more time for others who may be in the queue. 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. Second quarter earnings per share, excluding charges and credits was $0.43. This represents an increase of $0.05 sequentially and up $0.08 when compared to the same quarter last year. During the second quarter, we recorded $0.12 of severance charges. Our second quarter revenue of $8.3 billion increased 6% sequentially, largely driven by the growth in OneStim in North America and higher reservoir characterization and drilling activity internationally. Pre-tax operating margins increased by 75 basis points to 13%. Highlights by product group were as follows: Second quarter's award characterization revenue of $1.6 billion increased 5% sequentially, primarily due to higher Wireline activity in offshore North America, further progress on OneSurface integrated production system projects and increased SIS sales internationally.

Margins increased 166 basis points to 21.4% primarily driven by recovery of higher margin Wireline activity and stronger SIS software sales. Drilling revenue of $2.2 billion increased 5% sequentially, while margins decreased 83 basis points to 12.9%. The revenue increase was primarily driven by strong international drilling activity as a result of the start of integrated drilling projects. Margin was negatively impacted by start-up cost associated with new projects as well as operational delays. Production revenue of $3.3 billion increased 10% sequentially. And margins increased by 239 basis points to 9.7%. These results were primarily driven by OneStim growth in North America combined with higher activity in the Middle East and Asia area. Cameron Group revenue of $1.3 billion decreased 1% sequentially. This decrease was largely driven by declining project volumes in OneSubsea which were partially offset by higher sales for surface systems and valve and measurements in North America.

Margins were essentially flat at 12.8%. The book to bill ratio for the Cameron long cycle business was at one. Now turning to Schlumberger as a whole, the effective tax rate, excluding charges and credits was 17.2% in the second quarter compared to 17.6% in the previous quarter. Looking forward, the ETR will be sensitive to the geographic mix of earnings. As a result of the continued recovery in North America, we anticipate that the ETR will increase next quarter and over the remainder of the year. We generated $1 billion of cash flow from operations during the quarter. Our net debt increased $600 million during the quarter to $14.6 billion. We ended the quarter with total cash and investment of $3 billion. During the quarter, we spent $103 million to repurchase 1.5 million shares at an average price of $68.45. Other significant liquidity events during the quarter included CapEx of approximately $520 million and capitalized cost relating to SPM projects of $194 million.

During the quarter, we also made $693 million of dividend payments. Full-year 2018 CapEx, excluding SPM and multiclient investments, is still expected to be approximately $2 billion. And now I will turn the conference call over to Patrick.

Patrick Schorn -- Executive Vice President, Wells

Thank you, Simon. And good morning, everyone. In my comments today, I'll first discuss revenue growth by geography without Cameron and then conclude with some Cameron specific remarks on second quarter performance. Looking at our results in North America, revenue increased 12% sequentially. Or more precisely, revenue grew by 9% on land and by 22% offshore. The land revenue increase outperformed both the 7% increase in the US land rig count and the 8% improvement in the US land's frack market stage count. In Canada, activity dropped as expected as the spring breakup took effect. Offshore revenue grew due to market share gains in the well construction arena. Multiclient seismic license sales were also higher as we continued to focus on the new asset-light model at WesternGeco. OneStim pressure pumping revenue grew by 17%, driven by the deployment of additional frack fleets. Net pricing remains stable as increasing capacity across the market matched increasing customer activity.

We were also able to leverage the improved efficiency of our operations to grow revenue and gain market share. In particular, the investments in vertical integration supporting our pressure pumping operations has allowed us to respond rapidly to the increasing customer trend of separating pumping services from sand supply. This means that we're able to bet competitively on both integrated or stand-alone sand supply contracts to participate in the full revenue potential of each, particularly as we add more capability in sand supply on a regional basis. In the US land drilling market, activity was also strong, with a growing customer interest in integrated well construction services while demand also remained robust for rotary steerable systems. Based on industry figures, the average length of laterals have increased by 30% over the past four years.

And new well designs that balance lateral length with optimized stimulated reservoir volume to maximize productivity and manage cost continue to be tested. This approach is evident in SPM projects as well. The Palliser asset in Alberta, for example, restarted drilling activity after the breakup in June, initially with one rig before quickly ramping back up to four rigs in early July. Drilling technologies have been key to increasing performance here. PeriScope Mapping Service was combined with a PowerDrive Orbit rotary steerable system to enable drilling within a thin pay zone in three wells. A 100% reservoir contact was achieved in these thin pay zones which exceeds the previous reservoir contact of 85% to 90% in offset wells. In addition, PowerDrive Orbit enabled a higher ROP than wells drilled by others and also achieved the longest lateral ever drilled on this asset at a length of 4,244 meters.

Turning now to our international business, second-quarter revenue, excluding Cameron increased 6% sequentially as we responded to the challenges of mobilizing 29 rigs for new integrated drilling projects simultaneously in various geographies. With the commissioning of the new build rigs in places and the reactivation of stacked equipment in others, start-up cost, and operational delays impacted our financial performance in the quarter. In Latin America, revenue increased 3% sequentially. In the Mexico and Central America GeoMarket, additional rigs mobilized for an integrated drilling services contract on land while work over in production services also experienced increased activity. In the Latin America south GeoMarket, activity strengthened with projects restarting in Brazil and increased hydraulic fracturing and coiled tubing activity on an unconventional land SPM project in Argentina.

In Latin America north, activity was stronger in Columbia while revenue was sequentially flat in Ecuador due to operational delays. Revenue in Europe, CIS, and Africa across the product lines, excluding Cameron, increased 5% as drilling activity in the North Sea and Europe recovered from the winter slowdowns. This activity increase was concentrated around development work in the UK, in addition to exploration activity in Norway after recent Equinor contract awards. Drilling activity was also higher in continental Europe, and in particular, in Romania. Revenue in Russia was essentially flat sequentially due to delays in the start-up of summer offshore campaigns while land drilling activity remained solid. Revenue in sub-Sahara Africa increased with the start of new projects in Angola, Nigeria, Ghana, Ivory Coast, and Cameroon with well intervention activity accelerating and development work resuming in response to higher crude prices.

The North Africa GeoMarket benefited from solid activity in Libya, despite a challenging security environment and from integrated services activity in Chad. Middle East and Asia revenue, excluding Cameron, increased 7% led by the Far East and Australia GeoMarket. In the northern Middle East GeoMarket, good progress was made on OneSurface production projects in Kuwait and Egypt, while the eastern Middle East GeoMarket benefited from the start-up of integrated drilling projects in Iraq. In Saudi Arabia, an additional eight rigs have now been mobilized for lump sum turnkey work on the Ghawar Field with limited revenue growth in the quarter due to delays and logistical challenges in the start-up phase of the project. In Asia, growth in the Far East and Australia GeoMarket was due mainly to increased activity in Indonesia and offshore Australia while China benefited from a ramp-up in activity for Shell gas and [inaudible] including first-class production on a China SBM project.

In Southeast Asia GeoMarket, operations began on drilling projects in Myanmar, Vietnam, and India, despite some start-up inefficiencies. Southeast Asia experienced also some delays in Malaysia, although work on recently awarded contracts is strengthening as we move into Q3. Last, let me turn to Cameron, where increased revenue for service systems and valves and measurements was more than offset by lower project backlog at OneSubsea. Revenue declined 1% sequentially as a result. Geographically, the revenue growth in North America and Latin America was more than offsets by weaker revenue in the Middle East and Asia while Europe, CIS, and Africa remained flat sequentially. Beyond the numbers, I would like to highlight a series of contract awards that point to anticipation of more offshore activity restarts. For example, awards by Transocean mark the sale of the seventh new Cameron managed pressure release system.

In addition, we extended existing service contracts to cover maintenance and service on BOP systems on 13 of Transocean ultradeep water and harsh environment fleet as well as an order for a complete drilling package for deployment on a new build rig for service in the Caspian Sea. These orders support our view that the broad-based recovery is now also reaching the offshore market where drilling contractors are beginning to order equipment to upgrade rigs in anticipation of increased activity. And with that, let me pass the call over to Paal.

Paal Kibsgaard -- Chairman and Chief Executive Officer

Thank you, Patrick. And good morning, everyone. The broader-based recovery in the international markets has now finally started which led us to record sequential revenue growth in almost all GeoMarkets and nearly all product lines in the second quarter. One of our many growth drivers in the emerging international upcycle is our integrated drilling business where we, through our systematic R&E investments and domain leadership in drilling hardware, fluids, and software have created a highly differentiated well construction platform which today enables us to win most of the tendered work while at the same time deliver solid financial returns. Our tender win rates and backlog increase for integrated drilling projects over the past year is the highest we have ever seen. And based on these project wins, we will in 2018 mobilize a total of 90 land rigs, mostly third party, which by itself is equivalent to a midsize land drilling contractor.

In the integrated drilling business, the reduction of interfaces and improved definition of responsibilities between our customers and us create significant improvements in both quality and efficiency that benefit both parties. At the same time, the performance-based contracting model and the increased freedom we get to optimize drilling plans, select the appropriate technologies, and continuously innovate in the way we run our operations create additional value which is shared with our customers. One example of the operational innovations we are currently deploying on all our new drilling projects is multiscaling and remote operations which allow us to reduce the overall headcount on the rig side by up to 35%. Another example of operational innovation is how we are rapidly increasing the utilization of our operating assets through our global traceability system, our centralized planning centers, a more scientific methodology for equipment maintenance, and our unique, data-driven, drilling optimization software.

As a result, our drilling and measurement product line is, for instance, on track to double the asset utilization of our globally sold out rotary steerable fleet over the course of 2018 alone which helps improve the financial returns and reduce the level of current and future CapEx investments. Still, the ongoing mobilization of all the services needed for our new integrated drilling project will leave us with no spare equipment capacity by the end of 2018. In anticipation of this pending capacity shortage, we have already started to engage in pricing discussions with many of our customers which will allow us to invest in additional capacity. And it will allow our customers to secure this capacity in return for improved commercial terms. In North America land, we continue to deploy additional fracturing fleets during the second quarter, while pricing stayed flat as industry capacity additions matched the growth in customer activity.

Although the rate of permitting and the overall activity levels remain high, the takeaway constraints in the Permian could temper the activity growth over the coming quarters which is something we will monitor closely going forward. During the second quarter, we completed a very important milestone in our transformation program with the successful rollout of our new and streamlined field organization just in time for the emerging international upturn. This milestone caps six years of methodical investment into a new blueprint for our field operation workflows and organizational structure, including stronger and more professional functions, all equipped with cutting-edge planning, execution, and collaboration tools. The need to modernize our operating platform was clearly identified as far back as the late 1990s. But due to the technical complexity and the associated changed management challenges, it was left unaddressed until 2012 when we launched our corporate transformation program.

A modernized field operations and support organization will, going forward, set new standards for internal efficiency, quality, and teamwork which will lower our need for capacity related CapEx investments compared to previous cycles and at the same time support our promise of delivering 65% incremental margins in the coming upcycle. As part of this transformation milestone, we also completed the second and last step in the simplification of our management structure which will improve our agility and competitiveness and further lower our support costs. This was the basis for the head conflated charge we took in the second quarter, as outlined by Simon. Next, I would like to update you on the global oil markets and how we see the oil field activity unfolding in the coming quarters. The fundamentals of the global oil market continue to evolve favorably for our international business as the balance of crude oil supply and demand tightens further.

Global GDP growth remains robust. And oil demand growth was strong in the first half of this year, helped by cold weather in the northern hemisphere. Despite the increase in crude prices, the reporting agencies have not made any changes to their global oil demand forecasts which still stands at 1.4 million barrels per day for both 2018 and 2019, while we await further clarity around any potential demand headwinds from the ongoing US-China trade dispute. In spite of Opex's recent decision to increase oil production, the supply base continues to weaken with growing geopolitical pressure to remove Iranian barrels from the market with no apparent resolution to the falling production in Venezuela and with Libyan exports continuing to be mollified. At present, Opex's spare production capacity is limited to 2.1 million barrels per day from Saudi Arabia, Kuwait, and the UAE which is approaching the lowest level seen in the last two decades.

In North America, the pressure on infrastructure and export pipeline capacity from the Permian Basin is becoming an increasing constraint to production growth which will likely not be resolved until the second half of 2019. The USA producers are also experiencing production challenges linked in part to well interference as in-fill drilling and the producing acreage increases and as drilling continues to step out from the tier one acreage. And lastly, after more than three years of E&P underinvestment, the international production base has started to show accelerating signs of weakness with noticeable year-over-year production declines in 15 of the world's producing countries. These developments underline the growing need for increased E&P spending, in particular in the international markets, as it is becoming apparent that the new projects coming online over the next few years will likely not be sufficient to meet the increasing demand.

Looking forward to the third quarter, we expect the broader-based international recovery to continue with sequential growth driven by Russia, Asia, Latin America, and the Middle East, while we expect more nominal sequential growth in Europe and Africa. In North America land, we do not presently see any impact on the established activity outlook. And we plan to continue to deploy additional fracturing and drilling capacity while we closely monitor the evolution of the market, ready to adjust as needed. Due to its nature, the backlog driven business of Cameron has a cycle lag compared to our well-related product lines. However, the reduction in backlog for the long-cycle businesses is starting to slow, while the short cycle product lines are responding well to the recovery in both the North American and international markets.

Overall, for the third quarter, we expect a similar rate of sequential revenue growth to what we saw in the second quarter with a corresponding EPS growth that should again be in the range of 10% to 15% as we complete the major mobilizations for our new drilling projects. These numbers further assume a quick recovery from the offshore strike in Norway and the unrest we are currently seeing in the Basra region of Iraq which have both impacted our operations in July. Over the past four years, we have been opportunistic and expanding our offering to our targeted M&A program and our corresponding R&E investments which has allowed us to increase our total addressable market by 50%. Our broad and industry-leading technology offering together with our unmatched geographical footprint and our fully modernized operating platform make a very powerful combination that puts us firmly in the driver's seat to outperform in the coming global upturn.

And on that note, the entire Schlumberger team of 100,000 women and men are ready and primed to capture the growth opportunities coming from the positive market fundamentals we are now seeing. That concludes our prepared remarks. We will now open up for questions. Thank you.

Questions and Answers:

Operator

Ladies and gentlemen, if you would like to ask a question, please press * 1 on your telephone keypad. You will hear a tone indicating you have been placed in queue. And you may remove yourself from this queue by depressing the # key. Our first question is from the line of James West with Evercore ISI. Please go ahead.

James West -- Evercore ISI -- Analyst

Hey. Good afternoon, Paal.

Paal Kibsgaard -- Chairman and Chief Executive Officer

Hey. Good morning, James.

James West -- Evercore ISI -- Analyst

So, it looks like from my standpoint -- in 2018, you talked about 90 land rigs being mobilized but at 28 last quarter. Offshore is starting to kick in. You're talking back about your 65% incrementals at some point here when we get pricing. Could you maybe give us an idea of what regions of the world -- obviously good growth in Asia and Australia this quarter and continued growth in the Middle East. But what regions of the world -- or is it just everywhere that's starting to inflect? This is a big inflection for international.

Paal Kibsgaard -- Chairman and Chief Executive Officer

Yeah. I agree with you. It is a big inflection for international. And I would say that we are basically seeing it everywhere. We're not gonna see the same sequential growth rate from every region in every quarter. And while Russia and the Middle East was a little bit slower in sequential growth, this quarter we're seeing them right back with strong performance anticipated for Q3. Asia continues to be strong again for the second quarter in a row.

And Latin America, which we only had about 3% sequential growth in Q2 is going to be a lot stronger again in Q3. So, we are basically seeing new activity, new projects being discussed, more activity on the existing projects we have in pretty much every corner of the world. It's not gonna be a straight line for each of the regions. But we are very encouraged with what we see. We have, with the management team, been a lot in the field during the second quarter, seen a lot of our customers. And overall, the mood is actually quite upbeat which it's quite a while since we have seen this on our field visits.

James West -- Evercore ISI -- Analyst

Sure. Absolutely. And then with respect to pricing, it sounds like you got a little bit in Q2 of maybe some smaller contracts. But the discussion about the absorption of all your equipment by year-end, is that already a done deal based on contract awards that have already come through?

Paal Kibsgaard -- Chairman and Chief Executive Officer

Yeah. That's pretty much a done deal. That's basically mobilizing and honoring the commitments that we have already taken on. So, yeah. I would say during the course of fourth quarter of this year, we will be, I would say, fully utilized in the international market. And beyond that, we will look at adding capacity partly through CapEx but also a fair bit through driving the efficiency of our asset base that we have in place, now further helped by the upgrade we've done to our field organization. But during the fourth quarter, we will be fully mobilized. And we've already started these pricing discussions with our customers. Part of it is going to be price book uplift. Part of it will be potentially better terms and conditions and in particular also, new payment terms. We are still, I would say, not really satisfied with the evolution of our working capital. And this is mainly down to slow payments from our customers which we are actively looking to address.

James West -- Evercore ISI -- Analyst

Got it. Good luck. Thanks, Paal.

Paal Kibsgaard -- Chairman and Chief Executive Officer

Thanks, James. Thank you.

Operator

Next question is from the line of Angie Sedita with UBS Securities. Please go ahead.

Angie Sedita -- UBS Securities -- Analyst

Thanks. Good morning, guys.

Paal Kibsgaard -- Chairman and Chief Executive Officer

Good morning.

Angie Sedita -- UBS Securities -- Analyst

So, nice to hear the enthusiasm on the international side. It certainly feels more tangible than it has in some time. So, maybe you could talk a little bit about some of your integrated project awards. I think that was a key factor in where you see this absorption and capacity and how that plays into pricing. And then I know it's early, but maybe you have some early thoughts on international E&P spend for 2019. Is low-double digits a stretch? Or is that a possibility?

Paal Kibsgaard -- Chairman and Chief Executive Officer

Yeah. Okay. So, on the first part of your question, in terms of the areas of international as we discussed with James, we see it generally everywhere at this stage at varying rates. But in terms of the drilling projects, we also see them in most regions. Obviously, on land, for lump sum turnkey. We see that in Latin America. Very much so in the Middle East and also some in Asia. And we also have integrated projects more from a project coordination standpoint happening on land but also now occurring in the shallow water, offshore, where we're also starting to see a uptick in activities. So, overall, it's quite exciting. It's been a while since we were able to talk as optimistically about the international market as we can now. So, it's all positive. Now to your question on 2019, it's obviously early for us to make predictions about what our customers are going to do. I don't think they really started their planning exercises yet.

But obviously, we have a pretty good handle on our revenue backlog from all the project wins we have and the outlook generally we have on our business. And I can at least stay from our standpoint that our growth in international for next year will be double digits. Don't ask me where in double digits, but it's going to be double digits.

Angie Sedita -- UBS Securities -- Analyst

Okay. Thanks. That's very helpful. And then going to North America and the Permian, you made a little comment here on your deployment. So, maybe talk a little bit further about OneStim and the deployment for the rest of '18 and going into '19. And also, very interesting on the sand strategy with the vertical integration and your commentary by your customers. And should we expect further integration into sand? So, maybe a little bit on OneStim and then on sand.

Paal Kibsgaard -- Chairman and Chief Executive Officer

Yeah. On OneStim, we have continued to deploy our spare equipments. And we basically said that by the end of this year, we will be in a position to have deployed it all. We will do whatever rebuilds necessary. And that's currently ongoing. It's progressing well. And we continue to deploy now into the third quarter. We are aware of the emerging Permian takeaway constraints, but we have yet to see any real impact on the activity growth or any activity on pricing. So, we are continuing to deploy, and things are progressing well with OneStim. Now as for the vertical integration, we have been investing into this now for about three years. And we now own several sand mines. And our investment into sand mines will be concluded basically this month. We will then have sufficient sand mine capacity to take care of 100% of our current and also projected frack work.

We see this as a significantly competitive advantage going forward because there is a quickly growing trend from our customers now to separate the tendering for frack services and frack sand. And through the investments, we've done in vertical integration all the way from the sand mine to the rail to the trans-load and also trucking for the last mile where we have vertically integrated all aspects of this, not for 100% of our capacity but for a fairly significant part. That allows us now to bid very competitively for the stand-alone sand tenders which means that we can obviously compete in the entire revenue stream continuously which would have been a lot more difficult in the event we were not vertically integrated. So, we are basically done this month with our vertical integration investment program. And we're now in a prime position to really take advantage of that and continue the deployment of the remaining spare frack capacity we have by the end of the year.

Angie Sedita -- UBS Securities -- Analyst

All right. Thanks. That's very helpful. I'll turn it over.

Paal Kibsgaard -- Chairman and Chief Executive Officer

Thank you. Thanks, Angie.

Operator

Next, we go to the line Scott Gruber with Citigroup. Please go ahead.

Scott Gruber -- Citigroup -- Analyst

Yes. Thank you. Paal, can you discuss the outlook for the drilling segment, both revenues and margins in the second half? You mentioned double-digit growth internationally next year. Will the double-digit growth start to manifest within drilling in the second half, just given all the rig deployments? And then as the start-up costs fade, how should we think about the margin trajectory within drilling?

Paal Kibsgaard -- Chairman and Chief Executive Officer

Yeah. So, I would say the double-digit growth was an overall Schlumberger international projection for next year. For the second half of this year, I gave some indications around how we see Q3. And obviously, given the significance of these integrated drilling contracts, we expect significant growth within the context of the overall growth from the drilling group. There's been a heavy mobilization burden on them in the first half of the year. It will continue into, for sure, Q3. And that has impacted margins. We're not obviously happy with that level of margin, but we also understand that there are challenges with these type of deployments. So, you can expect going forward into the second half that both margins will improve. And we also will expect that the drilling group will be in the high end of our sequential growth as we go into the third quarter.

Scott Gruber -- Citigroup -- Analyst

Got it. So, while we're on the forward outlook, consensus currently stands at $0.51 according to FactSet for 3Q. Are you comfortable with that figure, given the trends you see today?

Paal Kibsgaard -- Chairman and Chief Executive Officer

Well, as I said in my prepared remarks, our view in the third quarter is that we will again grow roughly on the top line at the same percentage rate as we did sequentially in Q2 which is roughly 6%, which I think is more or less in line with the revenue consensus. On the EPS side, we're still again looking at probably 10% to 15% which, if you do the math, would probably be in between 47 and 50. And again, that's gonna come down to how effective we are in getting the mobilizations done.

And the quicker you get the mobilizations done, the lower your cost will be, and the quicker you will also get the wells into a position where you can recognize the revenue and the profit. So, there's a bit of a range. And it's down to the fact that we still will have a very heavy burden to lift on the mobilizations. So, that's the kind of range I would give you at this stage. But I will say overall, what is really driving our business going forward is going to be our ability to drive the top line. And I'm very pleased with where we sit in terms of contracts, tender wins, and the fact that we can execute these contracts going forward.

Scott Gruber -- Citigroup -- Analyst

Got it. Thanks for the additional color.

Paal Kibsgaard -- Chairman and Chief Executive Officer

Thank you.

Operator

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

Kurt Hallead -- RBC Capital -- Analyst

Hey. Good morning, Paal. Appreciate that summary on the operational outlook. Maybe I can ask a question here relating to cash use, cash flow, expectations, especially as you get these projects up and running internationally. And maybe you can give us a rough glimpse on how you expect free cash flow to progress maybe through the back half and maybe give a rough sense as to what cash flow could look like as we go into next year.

Paal Kibsgaard -- Chairman and Chief Executive Officer

Yeah. I'll make a couple of quick comments, then I'll hand it to Simon to elaborate a bit. But I would say, first of all, we're not satisfied with the free cash flow in the second quarter and even the first half, overall. The main issue around the cash flow is the consumption of working capital. And while we have a pretty good handle on inventory and payables, the main issue here is still high DSO and customers paying slowly. I'm not worried about being paid ultimately, but the rate of payment is too slow. And this is something we are already addressing in our commercial discussions with our customers. We have a very good handle on the internal part of the DSO. But we now need to get a bit more traction on the customer side. So, typically, our free cash flow improves considerably in the second half of the year, which we do expect it to do this year as well. So, we are overall going to be on track for the year as we plan. But the start in the first half has been slow versus our expectations. Simon, you want to elaborate?

Simon Ayat -- Chief Financial Officer

Not much to add here, but as Paal mentioned, we're not happy with the first half. It is similar to what we did last year, but we should have done better. The working capital consumption was a bit higher than what we expected. But the second half of the year, we always improve. And we expect the improvement to come and meet our target for the year. You ask on next year. Well, we haven't done any detail work yet, but given the fact that it is going to be a better year with our growth, and we will maintain our investment at the level that meets this growth. So, we expect to do better. And the other element of the cash consumption is obviously buyback. As you see, we will continue for this year at the modest level, so in order to preserve the cash to meet the business needs.

Kurt Hallead -- RBC Capital -- Analyst

Okay. Appreciate that. Maybe I can follow up as well. And Paal, again, you referenced you're still plan -- or have a target made for over 60% incremental margins. Obviously, as the cycle kicks in, you get pricing. Sounds like you talk about a broad-based recovery. Talk about accelerated activity levels. We talked about improving pricing on the international drilling and then double-digit revenue growth internationally next year. I don't know. Is it safe enough for us to assume with all that as a backdrop that you can potentially hit 60% incremental margins in 2019? I'm not trying to hold you to that or pin you down. I'm just trying to gauge based on your commentary and what you said your targets were in the past.

Paal Kibsgaard -- Chairman and Chief Executive Officer

Well, we are ready to ultimately be held to the 65% incrementals. That's for sure. When we will see the full effect of it next year I think is gonna come down to how much pricing we will get. What I'm very confident about is our ability to -- is to drive the internal efficiency from all aspects of our operations. And what we've done this quarter with a full implementation of our, I would say, fully modernized operating organization is gonna be a key driver to make that happen.

So, there's a lot of excitement in our field operations around now having this organization in place with cutting-edge tools and the ability to know how to drive overall efficiency from the vast international operating base that we have. So, this is gonna be a key component of ensuring that we deliver on the 65%. So, whether we get all the way there next year, I think it's gonna come down to I think more of how much pricing we get because I'm very confident about our own ability to execute efficiently.

Kurt Hallead -- RBC Capital -- Analyst

Okay. Great. Thanks, Paal.

Paal Kibsgaard -- Chairman and Chief Executive Officer

Thank you very much.

Operator

Next, we go to the line of Jim Wicklund with Credit Suisse. Please go ahead.

James Wicklund -- Credit Suisse -- Analyst

Good morning, guys.

Paal Kibsgaard -- Chairman and Chief Executive Officer

Good morning, Jim.

James Wicklund -- Credit Suisse -- Analyst

And we get to talk about international, and we can now talk about international pricing. So, that's all indicative of things definitely improving. Paal, I realize that we haven't planned for '19, '20, and beyond. But I look back at your margins in reservoir characterization and in drilling which are your most international segments. And in 2015, you had margins of 26% in reservoir characterization and 18% in drilling. And we're well below that now. I'm not asking when those margins recover, but is there anything fundamentally different in the market going forward that would stop you from getting back to those historical margins at some point in the next couple of years?

Paal Kibsgaard -- Chairman and Chief Executive Officer

Jim, no. I don't think there is. Obviously, we have conceded on price a fair bit over the past four years.

James Wicklund -- Credit Suisse -- Analyst

Yeah. that's near-term though. Takes a long time to recover, but --

Paal Kibsgaard -- Chairman and Chief Executive Officer

Yeah. So, no. And I'm confident that we can recover at least a fair bit of that. And that alone I think should be enough for us to get back to those kind of margins. This quarter, reservoir characterization made a pretty big step forward already. And the main issue around the drilling margin is not, I would say, the over execution capabilities and the technology portfolio which is highly differentiated. It's the fact that we are carrying a lot of mobilization and start-up costs and with that inefficiency. So, I would expect you to see fairly noticeable margin progression over the coming quarters in drilling. So, for us to, within the next few years, get back to those margins that you were indicating for characterization and drilling, I see as absolutely achievable.

James Wicklund -- Credit Suisse -- Analyst

Excellent. Excellent. That's very helpful. My follow-up, if I could, we talked a little bit about Cameron. I know the book to bill is at one. The backlog declined a little bit. There's been a lot of talk about FIDs picking up this year but from a exceptionally small base. A lot of the FIDs that have been issued are getting slow-rolled by their clients. Can you talk a little bit -- you have so much exposure and margin exposure to deep water. And deep water, the offshore drillers have obviously ran their stock prices up this year. Is there any increased visibility on when deep water may start to pick up and when Cameron may move that book to bill from one, which is just fine, to a higher number? Do we have any visibility on deep water at this point?

Paal Kibsgaard -- Chairman and Chief Executive Officer

Patrick, you wanna comment?

Patrick Schorn -- Executive Vice President, Wells

Sure. So, Jim, I think that at this moment, and what we have continuously said is that once the recovery starts, we obviously start seeing it on land. And we clearly are now having very clear evidence of what is happening in the shallow offshore. Equally, we are preparing ourselves further for deep water to start again as well. Whatever size of a bonanza this is going to be, I think at this moment is somewhat unclear.

But from the work that we have been doing in completing our technology portfolio, making sure that we have a leading technology on the boosting side, and clearly the work that we already signaled that we're doing with Subsea 7 to get a JV, that prepares us, even more, to be ready to play significantly in this market. We do see that we are going to go back in the years to come into a deep water activity because looking at the longer-term supply and demand, there is a certain amount of assets that will have to be developed. So, we're still positive on this market. I think at this moment, it is a little bit tough to call a deep water revival short term. But we are preparing ourselves further and certainly expect over the longer term the book to bill to go in more favorable numbers.

James Wicklund -- Credit Suisse -- Analyst

Okay, gentlemen. Thank you very much. Appreciate it.

Paal Kibsgaard -- Chairman and Chief Executive Officer

Thanks, Jim.

Operator

Next, we go to the line of Dave Anderson with Barclays Capital. Please go ahead.

David Anderson -- Barclays Capital -- Analyst

Hi. Good morning. So, as you're ramping up on the LSTK contracts and you're talking about the 90 rigs you're mobilizing this year, I was just wondering what this looks like going forward. You obviously have quite a bit of appetite for this type of work. Could you see another 90 rigs say, mobilized next year? I'm just trying to get a sense as to ultimately the breadth of this opportunity that you're seeing coming in front of you here.

Paal Kibsgaard -- Chairman and Chief Executive Officer

Well, at this stage, we don't have visibility into 2019 for that. But I think it's fair to say that we aren't expecting to see a similar type of ramp-up of that number of rigs in 2019. We expect to be very competitive in every bid that is out there for lump sum turnkey anywhere in the world at this stage. And we feel very confident in our ability to compete and win these tenders and also turn the tenders at competitive rates into good profits for Schlumberger. But I don't anticipate the same level of ramp up in 2019 as in 2018.

David Anderson -- Barclays Capital -- Analyst

Now is this still largely concentrated in Saudi? And I think we see a little bit in Oman. Can you just talk about maybe some other -- I don't know if you wanna get too specific here, but are you starting to see it's more broad-based in the Middle East? Or is it still concentrated in Saudi?

Paal Kibsgaard -- Chairman and Chief Executive Officer

No. It is not concentrated in Saudi. Saudi is a very important market for us. And we have a big ramp-up of rigs in Saudi over the year. But we have, in addition to that, countries like Mexico, Iraq, India just to name a few. And there are other countries in the Middle Eastern Gulf area as well where we are starting to take on these type of contracts. So, this is much more broader based than one particular country.

David Anderson -- Barclays Capital -- Analyst

Thank you. On a separate subject, Patrick, you had talked about the Palliser Block and where you are with the four rigs. I was wondering if you could tell us where you are in terms of the progression on the wells and the success of that project. We haven't heard too much about that. And during the quarter, there was some talk about monetization. I was just wondering what that means. Does that mean you could potentially be selling out some of your working interests? Do you taking on partners? Just if you could give a little bit more color on, that would be great. Thank you.

Patrick Schorn -- Executive Vice President, Wells

Okay, Dave. So, at this moment, we have about 15 active SPM projects. And let me try to give you a bit of a detail on some of the key ones. Palliser, the one in Canada, we did talk about that. We are at the moment active again with four rigs. We'll do well over 100 wells on that asset during this year. As you know, this is one where we are shifting from a gas producing asset to an oil production. The wells are performing very well. We're pleased with the reservoir performance that we've seen, with the well locations that we have. So, this is going as per plan. Quite keen on that. Ecuador remains active for us with the three assets that we operate there. In Argentina, we're picking up further on the Bandurria sewer asset. And again, there we're having very good success with the technologies that we deploy in the reservoir. And then maybe the last one to highlight would be Nigeria, where we have a project with first E&P and NNPC.

And that is on track to FID here very, very soon. So, just to give you a bit of a broader view on it, the opportunities for new projects really remain plentiful, but we are only considering those at the moment that really fit with what we call the SPM live business model where capital intensity and key cash flow are much more key criteria in defining which project ultimately fits with us and which doesn't which is much in line with the communications that we have had previously. So, in the SPM light context, we've also spoken about monetization of the SPM investments. And there are several assets in our portfolio that are reaching a level of maturity where we have generated a value that we are going to be able to sell. And here, you would have to think really about farming or for selling certain portions of our equity in these fields. And this is what we want to do in the next 12 to 18 months, once we really start reaching peak valuation on them.

On the last point maybe around SPM and what was highlighted during this quarter was that we exited the one LNG venture which might have come a bit as a surprise. It's still a business that we believe very much in which is a business around stranded gas and FLNG technology. But for us, it has been a decision that we exited purely based on the intensity of capital required for this project. And when we entered, we were very clear on we are very keen on investing in the upstream, not so much in investing in the vessels itself, as that's really not where our money is best employed. And maybe with that, I've given you a bit of an idea where we are with the main activities around SPM.

David Anderson -- Barclays Capital -- Analyst

Great. Thanks, Patrick.

Paal Kibsgaard -- Chairman and Chief Executive Officer

Thank you, Dave.

Operator

Next, we go to the line of Bill Herbert with Simmons. Please go ahead.

Bill Herbert -- Simmons -- Analyst

Thanks. Good morning, Paul and Simon. So, assuming a double-digit increase in international revenues for 2019, how should we think about capital spending consolidated as a percentage of revenues in 2019? Should it look much like it has in 2018? Or should the capital intensity go lower, given the mobilization unfolding for this year?

Paal Kibsgaard -- Chairman and Chief Executive Officer

So, obviously, we haven't gone through the detailed planning for next year. So, it's early to make firm statements about this. But I think directionally, I think you can expect the CapEx as a percentage of our revenue going into this upcycle versus previous upcycles is going to be considerably lower. What the absolute number for 2019 CapEx would be, like I said, it's too early. But I think the planning number I would have on my piece of paper today would still be around the $2 billion mark.

And I think with that, coupled with the big upside we are now starting to see from the complete modernization we have done of our operating platform is gonna drive significant asset utilization efficiency. I mentioned in my prepared remarks that drilling and measurements, for instance, in 2018 alone will double their asset utilization of our sold out PowerDrive technologies. So, you can expect us to be for the base business as well a lot more capital efficient in this upturn compared to what we have been in previous upturns. And we haven't been too bad in the previous upturns either.

Bill Herbert -- Simmons -- Analyst

Okay. Great. Thanks. And you mentioned that pricing was stable in the second quarter for lower 48. And I presume that meant frack and OneStim. I'm just curious, given the occlusions that are unfolding in the Permian and the slowdown in drilling activity that we've seen the past eight weeks and what likely will be a slowdown in completions activity, can you comment on the cadence of OneStim deployment going forward and then moreover, just your expectations in general for pricing? It seems like it's softening on the margin for the industry.

Paal Kibsgaard -- Chairman and Chief Executive Officer

Well, in terms of the cadence of the OneStim capacity deployments, I don't wanna go into the details of it other than that we basically said that over the course of this year, we would rebuild the equipment and be in a position to reintroduce it into the market. We are continuing to progress well with that plan. There'll be always some variations in the deployment rate by month or by quarter. But at this stage, we're not altering the plan based on some of these takeaway constraint discussions around the Permian. We have yet to see that in the projected activity growth.

But again, this is something we will monitor very closely. And in the event there's a need to adjust, we will adjust. But as of now, we are continuing to deploy, and this is why we are outgrowing both the rig count and the stage count in the market with these deployments. And as to pricing, flat pricing for the OneStim business roughly in the second quarter. We have not seen any kind of major movements beyond that so far into the third quarter either. So, it looks pretty stable as per now. And we continue with our plan. And as with anything in the North American land market, you gotta be on your toes because it can change quickly.

Bill Herbert -- Simmons -- Analyst

Okay. Thank you.

Operator

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

Jud Bailey -- Wells Fargo -- Analyst

Thanks. Good morning. A question, Paal, if I could. You referenced the expectation of double-digit international revenue growth next year. Bit curious, No. 1, how do you think your visibility for achieving that kind of growth next year? And then No. 2, how do you think about the drivers of that growth -- I guess for me, they're a regional standpoint -- and also how you'd see the potential split between offshore and onshore growth playing out next year as well?

Paal Kibsgaard -- Chairman and Chief Executive Officer

Well, again, I gave the double-digit international growth numbers basically because we are confident on the backlog we have of contract wins, and we know where these wins are and how It's going to shape up. Now, we have not done the detailed planning. So, I can't give you any kind of granular review of where it's gonna come. But I would say in general, we see growth in all geographies next year. And I would say land is still likely to be the driving force of it. Obviously, a lot of our lump sum turnkey has hit some land. And this is where the shorter cycle barrels are.

But I think we will start to see movement, in particular on shallow water as well. I believe there are some movements in shallow water rig rates, which I think is a very good precursor to what is likely to happen. And going back to deep water, deep water drilling activity in 2018 is roughly going to be 10% up versus '17. And I think the growth in deep water will probably continue and potentially accelerate as well into 2019. So, I know I'm not giving you the details you're looking for mainly because we haven't done the detailed planning as of yet. But I see no region of the world which we see as a region that is not going to grow in 2019. And we find that to be very good news.

Jud Bailey -- Wells Fargo -- Analyst

Okay. Cool. I appreciate the comments. And I'd say my follow up would be most of the commentary so far industrywide has been on the expectation that development work will dominate the next life of deep water activity. Are you seeing any hints of improvement in terms of exploration on the deep water side? Or is it still dominated on the development side?

Paal Kibsgaard -- Chairman and Chief Executive Officer

It's a good question, actually. Obviously, in terms of the absolute volume, it is dominated by development. But we are starting to see that exploration spend appears to be turning a corner as well. The current level of exploration investment over the past three, four years is obviously clearly not sustainable. And we are starting to see some uptick there. Q2, in terms of exploration, recon was actually up 22% sequentially at about 7% year-over-year. And we expect that in 2018, exploration, drilling, and well services spend is probably gonna be around 12% higher than 2017.

So, both deep water and exploration is starting to show double-digit growth already in '18. And I can only see that accelerating going into 2019. And associated with exploration, we are actually also starting to see more interest and more discussion with our customers again on information evaluation, this being either in Wireline or LDBD. And actually, customers going back into talking more reservoir with us. And obviously, this is very good news for some of our high-end and measurement related businesses as well. So, exploration is coming, and it's also associated with increased focus on reservoir information evaluation.

Jud Bailey -- Wells Fargo -- Analyst

Great. Thank you. I'll turn it back.

Paal Kibsgaard -- Chairman and Chief Executive Officer

Thank you.

Operator

And our last question is from the line of Waqar Syed with Goldman Sachs. Please go ahead.

Waqar Syed -- Goldman Sachs -- Analyst

Thank you very much. Appreciate that. Paal, the pricing improvement that you expect later in the year, would that start to have a benefit in first half of '19? Or do you see that by the time it turns into contracts, revenues could be late '19 or even 2020?

Paal Kibsgaard -- Chairman and Chief Executive Officer

No, I think the pricing discussions we are starting to have now -- and we had some pricing improvements already happening in the second quarter. They're not big enough to be material so you can see them in our results. But we track this very carefully. And we have specific plans by customer and by contracts and by market on how we are going to engage into recover some of the big concessions that we have made. So, the pricing improvements we are now discussing and seeking should have a gradual impact on our results going forward. So, I would say the discussions we are having in the second half of this year should have an impact on our results in the first half of 2019.

To what effect? It's still early to say. But will activity continue to go up? With ourselves at least, being fully deployed capacity-wise by the end of the year, I think it's only natural that pricing comes up and starts to be a bit of a tailwind on our results. And it's been a pretty significant headwind for four years in a row now. So, I'm encouraged in terms of what I'm seeing around the pricing discussions and also optimistic that this will become more of a noticeable tailwind as we go into 2019.

Waqar Syed -- Goldman Sachs -- Analyst

And then just finally on that, as you go into 2019 and you're expecting revenue growth internationally in double digits, could you do that with the same kind of capital budget around $2 billion? Or do you think the CapEx will need to grow as we go into next year?

Paal Kibsgaard -- Chairman and Chief Executive Officer

No. We can do that with the same CapEx budget of $2 billion. That's on the back of the modernized field operating platform.

Waqar Syed -- Goldman Sachs -- Analyst

Okay. Great. Thank you very much. Appreciate it.

Paal Kibsgaard -- Chairman and Chief Executive Officer

Thank you, Waqar. So, before we close today's call, let me summarize the main messages. Oil fill activity strengthened in the second quarter, both in land in North America and also throughout the international markets. And as a result, we delivered strong, sequential revenue growth. With a total of 90 rigs being mobilized over the course of 2018, the integrated drilling services model is one of our many growth drivers in the global upcycle we are now entering. The second quarter saw us complete an important milestone in our transformation program as we rolled out our modernized field and support organization. And linked to this, we also completed the second and last step to simplify our management structure which altogether puts us in a great position to outperform in the emerging global upturn both in terms of topline revenue and bottom-line earnings growth. With that, we conclude today's call. Thank you for participating.

Operator
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Teleconference Service. You may now disconnect.


Duration: 62 minutes

Call participants:

Simon Farrant -- Vice President, Investor Relations

Simon Ayat -- Chief Financial Officer

Patrick Schorn -- Executive Vice President, Wells

Paal Kibsgaard -- Chairman and Chief Executive Officer

James West -- Evercore ISI -- Analyst

Angie Sedita -- UBS Securities -- Analyst

Scott Gruber -- Citigroup -- Analyst

Kurt Hallead -- RBC Capital -- Analyst

James Wicklund -- Credit Suisse -- Analyst

David Anderson -- Barclays Capital -- Analyst

Bill Herbert -- Simmons -- Analyst

Jud Bailey -- Wells Fargo -- Analyst

Waqar Syed -- Goldman Sachs -- Analyst

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