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Schlumberger NV (NYSE:SLB)
Q3 2019 Earnings Call
Oct 18, 2019, 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. [Operator Instructions]

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

Simon Farrant -- Vice President of Investor Relations

Good morning, good afternoon, good evening, and welcome to the Schlumberger Limited third quarter 2019 earnings call. Today's call is being hosted from New York City, following the Schlumberger Limited Board meeting held here this week. Joining us on the call are Olivier Le Peuch, Chief Executive Officer; and Simon Ayat, Chief Financial Officer. Our earnings call will take a slightly different format. We've shortened our prepared remarks in order to leave more time for your questions. Olivier will start the call with his perspective on the quarter. Afterwards, Simon Ayat will give more details on the financial results. Then we'll open up for your questions.

As always, before we have again 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 filing and other SEC filings.

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

Now I'll turn the call over to Olivier.

Olivier Le Peuch -- Chief Executive Officer

Thank you, Simon. Ladies and gentlemen, good morning. I would like to add to the earning release, my comments on the quarter before covering some of the points critical to our business.

First of all, as we are seeing the release this morning, we have taken enough of the non-cash, $12.7 billion charge. This charge reflects the impact that market conditions have had on the valuation of our goodwill, intangibles and fixed assets. None of this changes our ability to generate strong cash flow, as this quarter as once again demonstrated. Giving us flexibility to navigate the more uncertain market landscape.

Simon Ayat will discuss the charge during his remarks. I will now comment on our Q3 operational performance followed by the short-term outlook and conclude with a brief update on our strategy implementation. Our first quarter results were very positive in a mixed environment, driven by strong international performance. The international margins improve and we deliver more than $1 billion in free cash flow.

Additionally, we recorded the best ever, the best ever quarterly safety performance for the Company, an outstanding achievement setting new safety performance benchmark for our industry. All in all, based on the quarter aligned with our performance vision and our focus on returns. I'm very pleased with the results and I'm proud of the Schlumberger team that delivered this performance.

The financial results this quarter were driven by the strength of activity in the key international market. Similar activity picked in Russia, the CIS and the North Sea. The Far East and Asia regions also saw strong growth. And new projects began in Sub-Sahara and North Africa. Only Latin America revenue was lower on reduced activity, Mexico and Argentina. In North America, we experienced strong offshore sales offset by minimal growth on land. OneStim activity was modestly higher recovering from the spring break-up in Canada during Q2.

Towards the end of the quarter, our -- we saw lower pricing and increased gaps in the frac calendar, customer award programs were constrained by cash flow. North America land drilling revenue was essentially flat, despite rig count reductions as our fit for basin technology access approach, on equipment sales and leasing as offset decline. Cameron results closed in line with expectations. This included robust operating margins, building on sequential growth in most international regions, which were offset partially by declining activity in North America at the end of the quarter.

Our international performance this quarter was very solid. With the high double-digit basis points improvement in our margin on the back of 3% sequential revenue growth. More than two-third of our product lines and GeoMarkets posted both sequential revenue growth and margin expansion. Leveraging in [Indecipherable] favorable, offshore and exploration activity mix and the deployment of new technology.

At the closing of this quarter, half of our international GeoMarkets have posted year-to-date double-digit revenue growth. This improvement in international margins was achieved despite the lingering and sustained effect of a handful of contract that's highly dilutive. Without the effect of these under-performing business units, our growth in international margins would have been even greater. We are making progress engaging with our customers on those contracts, working collaboratively to improve terms and condition and to enlist their support to improve our operations. As part of this plan, I've been taking personal actions during the last few weeks and anticipate visible progress during the coming months and quarters.

Margin improvement and stringent capital deployments are both part of our increasingly retail focused approach under the new capital stewardship element of the strategy. As international activity increases, our performance [Phonetic] capex will be further price rise toward the business units with higher returns. These actions together with increasing activity is starting to create some tightness in the market which is a catalyst for pricing improvements.

Now I will move on to the short-term outlook for our business. Based on our Q3 year-to-date results and our outlook for Q4, we still expect full year high single-digit International revenue growth excluding Cameron. Sequentially, however, Q4 will include the seasonal activity decline in the Northern hemisphere. And we anticipate only muted year end sales. We are also closely monitoring the situation in the Ecuador following the recent events and are preparing for further decline in Argentina.

In addition, we expect seasonal weaknesses in North America as the fourth quarter develops. We are anticipating a year end slowdown in North America, similar to last year due to operator budget constraints. However, this year the activity reduction has started earlier than last and we anticipate the second should decline in Q4 to be more pronounced than last year.

Moving on to the macro and medium term view. The macro environment remains challenged with limited visibility, particularly in view of the global trade concerns that are challenging both economic growth and the rate of oil demand growth. At the same time, the US production growth rate has declined for the last eight months and it is expected to drop further in 2020 as a result of the reduced activity this year. Therefore, and that's sort of a recession, the prospects for international activity growth remain firmly in place.

In these market context, our approach in North America land is under evaluation. For both the medium and the long-term. We are already scaling to fit the OneStim business and we will be starting fleet as the market contracts during the fourth quarter. At the same time, the strategic review of this market is well under way. And will be completed during the fourth quarter for execution early next year. This gives me the opportunity to update you on our strategy execution.

Last month, we presented four four key elements of that strategy that included leading and driving digital transformation in our industry, developing fit-for-basin solutions, capturing value from the performance impact for our customers and fostering capital stewardship. Performance is at the heart of this new strategic direction.

We are already off to an excellent start on digital. We presented our vision of the E&P industry to 800 customers and technology partners at the global SIS Forum in September. There we demonstrated our firm commitment to an open digital environment that we believe can unlock further customer performance. This Forum mark a new chapter for the digital future of our industry. The intellects from our customers and digital partners was far beyond our expectations and is already translated into sizable opportunities.

The central JV is also an important part of our digital strategy. And the announcement of its closing reinforces our leadership of, and commitments to the industry digital transformation. We're also making progress with our new fit for basin strategic approach. In the release today, there are multiple examples of fit for basin technology, all of which drive our customer performance, such as NeoSteer at-bit steerable system and edges drill bit technology.

In addition, in North America, I'm pleased to report early success of the technology access strategy, we've said and leasing of rotary steerable tools. This is a new channel that access to new markets where our participation was previously minimal. Also in North America, our flagship project with Oxy in the Aventine Basin is now operating at scale. We've continuously improved operational efficiency, setting new frac goals in the Delaware. The value being created is shared through underlined commercial model and is a good example of our new strategy performance model approach.

Finally, as another base to our SPM strategy, we have big progress in our divestiture of Argentina assets as we have few offers in hand that we are altering with the anticipation to finalize with the other party during the upcoming months. Since taking the whole as CEO for summary, I've made a point of visiting many of our customers, our people and our locations. The reception by customers to build for engagements and strategic direction has been very positive. The enthusiasm of our people has been highly motivating and their commitment is dividend. The industry is acknowledging the need for higher performance in the New York.

We know, I'm very pleased with the initial steps of our strategic execution and we have internal and external alignments with our vision to become the performance partner of choice in our industry.

I will now pass the call over to Simon.

Simon Ayat -- Executive Vice President and Chief Financial Officer

Thank you, Olivier. Ladies and gentlemen, thank you for participating in this conference call. Third quarter earnings per share was $0.43 excluding charges and credits. This represents an increase of $0.08 sequentially, and a decrease of $0.03 when compared to the same quarter last year. During the quarter we recorded $12.7 billion of pre-tax charges driven by market conditions. These charges primarily relate to goodwill, intangible assets and fixed asset impairments. As such this charge is almost entirely non-cash.

Details of the component of this charge can be found in the FAQs, at the end of our earnings press release. These impairments were calculated as of August 31st, 2019. Accordingly, the third quarters results benefited from a $27 million reduction in depreciation and amortization expense. Approximately $21 million of this $27 million monthly reduction relates to the Production Group. The remaining $6 million is reflected in our Corporate & other line item.

The after-tax impact of this one-month reduction is approximately $0.015 in terms of EPS. Our third quarter revenue of $8.5 billion increased 3% sequentially, largely driven by our international operations. Pre-tax segment operating margin increased by 113 basis points to 12.8%. Highlights by product group were as follows. Third quarter is a broad characterization revenue of $1.7 billion increased 6% sequentially. While margins increased 149 basis points to 21.8%. These increases were primarily driven by strong international wireline activity and higher WesternGeco multiclient license sales in North America.

Drilling revenue of $2.5 billion increased 2%, driven by stronger drilling activity in Russia, China and Australia. However, this was partially offset by lower revenue in North America land and Saudi Arabia. Margins were flat at 12.4%. Production revenue of $3.2 billion increased 2% sequentially, primarily driven by strong international completions activity. Margin increased 148 basis points to 9.1% primarily driven by improved international margins from higher activity. The reduction in depreciation and amortization expense as a result of the third quarter impairment charge accounted for just under half of the margin improvement.

Cameron revenue of $1.4 billion increased 3% sequentially, primarily driven by OneSubsea margins increased 29 basis points to 12.7%. The book-to-bill ratio for the Cameron long-cycle business was 0.8 in Q3. The OneSubsea backlog increased -- decreased to $1.8 billion at the end of the third quarter. This decrease reflects a cancelled project in the North Sea.

Now turning to Schlumberger as a whole, the effective tax rate, excluding charges and credits was 16% in the third quarter as compared to 16.7% in the previous quarter. We generated $1.7 billion of cash flow from operations during the third quarter. Our net debt improved by $347 million during the quarter to $14.4 billion. We ended the quarter with total cash and investments of $2.3 billion. We received $250 million in cash and just after the quarter as a result of the closing of the Sensia joint venture. During the third quarter, we issued three tranches of EUR500 million notes each. The first is due in 2024 at 0%. The second due in 2027 at 0.25% and third due in 2031 at 0.5%. These notes were subsequently swapped into US dollars with the weighted average interest rate of 2.5%.

During the quarter, we also repurchased $783 million of our outstanding 3% notes due in 2020 and $321 million of our outstanding 3.625% notes due in 2022. These actions have served to improve the Company's capital structure. During the quarter, we spent $79 million to repurchase 2.2 million shares at an average price of $36.64. Other significant liquidity events during the quarter included, capex of $415 million and capitalized costs relating to SPM projects of $194 million. During the quarter, we also made $692 million of dividend payments. Full year 2019 capex excluding SPM and multi-client is expected to be between $1.6 billion and $1.7 billion.

And now I will turn the conference over to operator for Q&A.

Questions and Answers:

Operator

Thank you. [Operator Instructions] First, we go to the line of James West with Evercore ISI. Please go ahead.

James West -- Evercore ISI -- Analyst

Hey, good morning, Olivier.

Olivier Le Peuch -- Chief Executive Officer

Good morning, James.

James West -- Evercore ISI -- Analyst

So, Olivier as you exited the third quarter, could you describe what the market conditions were? How we should think about the fourth quarter? It sounds like sequentially down. And then also how was 2020 in your view starting to shape up?

Olivier Le Peuch -- Chief Executive Officer

Yeah. Now, let me comment on this James. So I'll sit by my comments between international and North America land specifically. So first on the international side, I think similar to what we see every year, there is a seasonal effect in the Northern Hemisphere, due to -- due to the winter season that affects the -- primarily Russia, lesser extent China and the North Sea. And we see an effect every year on the rig activity and our revenue that we collect from those -- for those region. So this is not unusual. We don't expect anymore impact than we have every other year, but I think this is something to account for.

We typically on year end, also have year-end sales of product, equipment and we believe this will happen, but this will be as we have seen in the last two or three years, fairly muted annual sales as the operator will remain cautious on the budget in preparation for 2020. On the flip side, on the North America land, as I did comment in my introduction remarks, I believe that the rate of decline will be at the risk to be higher than last year, as for two reason, the usual holiday season, a break in the winter, I think is looming. But also we have seen that the budget exhaustion and discipline on operating within cash flow as lead operator to cease operation earlier than they did last year.

We have started to get notice of operation gap from September and the rates of this -- of the decision has been accelerating. So we expect, there's a consequence that the rate of decline quarter-on-quarter in North America, might be higher than last year sequential decline. Now, turning into next year, I think as some of major -- as I commented the major recession or major events, geopolitical or economic event, we foresee that the international growth will remain in place. Albeit proceed with different lower rate possibly, but we believe that the software offshore activity, deepwater or shallow will not cease overnight and will continue to support 2020 international growth.

When it comes to North America, it's still early to call, I believe that the market still lacks visibility and we will -- can only comment on the rebound in the Q1 that is usual rebound from the holiday season that we foresee happening with strengthening of activity from January and possibly strengthening of pricing, but this is too early to call.

James West -- Evercore ISI -- Analyst

Okay. That's very helpful, Olivier. Thank you. And then with respect to the charges that were taken during the quarter. Understanding they only helped EPS by about a $0.015 here, what drove the timing here of the -- of taking these charges, especially kind of mid-year, why not end of last year?

Simon Ayat -- Executive Vice President and Chief Financial Officer

James, Simon Ayat here, I'll take this. Basically high, you know during -- there are two events that took place in the third quarter that made us look at closely at the carrying value of our assets. One is the new strategy by Olivier, which has been publicly announced and discussed and we continue to develop it as we go forward. The other one is the market valuations that we have seen. Although we have touched lower the point before, I'll take the second -- second reason first and then discuss first one. Although we've seen lower valuations before, but during the third quarter we're more consistent and frankly very low point unfortunately. That forced us to look at our good will and intangible carrying value.

As you are aware, most of the goodwill and intangible comes from two major acquisition. In 2010, we did the Smith acquisition, which is -- was almost 100% paid by stock, reached $138 million shares at that time. And then Cameron in 2016, where we paid almost 78% in stock. The book value of those two acquisitions were booked for the Smith at $56 per share for Cameron at $72 per share. As such our carrying value of the goodwill and intangible, it's inflated, given where our current valuation is, and this has taken very long analysis pretty scientific actually and we reach to this number.

Why it is in the Q3, because it is a Q3 event. We record things as they happen. We don't -- we're not influenced by timing. Yes, normally at the end of the year, we do a more thorough review, but given the changes we've seen in the Q3, we did this thorough review in Q3. The other items that you have seen which is mainly fixed asset impairment and mainly in OneStim North America is the reflection of our actions toward this activity. As Olivier mentioned, we're looking at this activity we have excess capacity there, and we've taken the decision that this is impaired. We don't see it as reactivated in the near future and we took the decision to write it off.

So I cover the reasons behind it. I know I answered more than what you asked, but I want to consider that everybody understand our approach and why it is Q3. It's not just because, we have change of mind. It is a reflection of real issues that took place in the third quarter.

James West -- Evercore ISI -- Analyst

Got it. Thanks, gentlemen.

Simon Ayat -- Executive Vice President and Chief Financial Officer

Sure. Thank you.

Operator

Next, we go to Angie Sedita with Goldman Sachs. Please go ahead.

Angie Sedita -- Goldman Sachs -- Analyst

Good morning, Olivier.

Olivier Le Peuch -- Chief Executive Officer

Good morning, Angie.

Angie Sedita -- Goldman Sachs -- Analyst

So I appreciate the color on the international markets and little bit of a follow-up there on the pace of growth for 2020. I know it's early, but do you still feel comfortable with mid single-digit revenue growth in 2020? Or is it still a bit early to tell for sure? And then also, I would guess. I would add to that, the asset sales that occurred in 2019, the impact on both revenues and margins.

Olivier Le Peuch -- Chief Executive Officer

Yeah. Let me take the first and then I would take the second one shortly. I think to be -- created mid-single digit -- that in a low or high. I think it's too early to pull and call at this point, not that we don't have good visibility, but I think the customer are still in the process of setting their budget for 2020 and are serving the macro economic factor that you all know about. I think we have to be cautious here. We believe that the continuum of offshore activity and the momentum that industry has set there is not here to start, particularly on the deepwater side, but I think some other region and some other basin will be more risk of a decline in activity or decline in budget for next year. It's too early to call, but clearly we see growth in international next year.

So when it comes to the impact of the announcement -- announced divestiture. So we have a three divestiture under way, one is already closed, the Sensia divestiture as we closed two weeks ago. The second one, relates to the divestiture of asset to a JV that we own with ADC and the third one relate to drilling and tubular accessories, tourist fishing that we are divesting. So when you look at the impact of these three on a yearly basis. The revenue will be short of 2% of global revenue as an impact when combined with three, when the three will be completed, closed and exited. And the impact on the earnings would be $0.01 to $0.02 for the year. So a sudden may want to avoid a bit more, but that's the impact on a full year basis.

Simon Ayat -- Executive Vice President and Chief Financial Officer

I just want to explain that two of the transactions or the divestitures are basically creating JVs or one -- one is creating the JV of Sensia and the other one, enhancing the JV of ATC drilling in the Middle East. So we're losing the revenue and the reason we are not losing as much in earnings, because we will have a higher pickup of our equity participation in the two JVs. And the third one has really minimum impact on the profitability. And therefore as Olivier mentioned, it's a $0.01 to $0.02 per year impact on margin. However, the revenue is a larger impact less than 2% of the total.

Angie Sedita -- Goldman Sachs -- Analyst

Okay, perfect. That's very, very helpful. I appreciate the color. And then I guess a little bit further on the international side thoughts around the pace of margin growth for 2020 given your initiatives on the transformation, digital and these, obviously these asset sales as well. But and then these contracts that you're trying to address in the Middle East. So I was just talking about margins for next year on international and the pace.

Olivier Le Peuch -- Chief Executive Officer

So, I will comment on the target. I think target is not set. That ambition we have is to continue to grow and expand our margin internationally. And we have seen a better month that we have high double-digit basis points improvement during the quarter. I will continue to look and work using the strategy to execute to a part of margin expansion for years. So if you look at it from a very high level, there are three buckets. What -- that we see, the first one relates to our ability to resolve some of the underperforming business units, the highly dilutive contract that lingering and impacting our results.

We have made some progress, not to the pace, I would have expected, necessarily on being very ambitious this year, but I think I'm confident that we have a path to improve this that will impact our results next year. Similarly in the first bucket that will put, continue to execute using our new modernized platform of operating system. And I think we are setting a three year draw back to complete our transformation internationally. And I look forward to have also some pull through on that operating model with efficiency of self-help as we call it impact on our margins.

And next bucket is obviously -- I would call it the digital and all the technology assets trying to get some of the success we have seen in North America, overseas, in technology assets intake to third-party regional players for accessing our technology and using it with lower and lower capex intensity markets. And digital where we expect that the outcome of what we have just done last month and the momentum that we have gained through industry will give us an increased share of the digital market, and as such will be contributing to the margin.

So last will be further long-term outlook on the performance model and other horizon of growth that we will disclose later. But I believe these two bucket will clearly impact the next two or three years, but it's difficult to say at this moment, but I have the ambition to grow international margin next year indeed.

Angie Sedita -- Goldman Sachs -- Analyst

Thanks. I'll turn it over, guys.

Olivier Le Peuch -- Chief Executive Officer

Thank you.

Operator

Next, we go to David Anderson with Barclays. Please go ahead.

David Anderson -- Barclays Capital -- Analyst

Hi, good morning, Olivier. So on your fit for basin strategy, you're -- obviously you're focused on the North American business right now and I have to write down assets during the quarter, you talked about more of a strategic review in the fourth quarter, we're talking about 2020 numbers, but it's kind of hard to get there with all these changes happen in North America. I was wondering if you could just kind of just lay out a little bit kind of what you guys are looking at like what parts of the North America business are under the strategic review. And should we expect kind of a broader retrenchments in certain parts of the US land business next year.

Olivier Le Peuch -- Chief Executive Officer

No. Very good question, David. So, as we have explained during the strategy presentation back a month and a half ago. We are doing a deep review of the entire business. We are operating in North America land. And this is not only OneStim, but every part of our business there. And the first thing we are doing is, we are doing scale to fit approach to the market view, meaning that we are not doing after scale, we are doing after what we believe is fit for every business in every basin. So this is what we are in the middle of doing as we speak for OneStim in each of the basin where we operate. And for each of the public line where we are going to be operating in the North America land. So we are back to scale to fit approach to our strategy.

To review the outlook, to review our market position to review our strengths, anticipated technology and opportunity with customers and making a decision at that point on the -- on how to treat this portfolio and move forward with reduced portfolio, more 51 or multiple basin as opposed to all basins or make a decision to change of business model to go for technology assets, selling our technology as opposed to operating our technology. So that's the reason, the efforts we are taking as we speak. We are complementing it by recognizing that there are some technology that we have developed, but are highly successful.

And we continue to feed our technology team with what is the need to differentiate in basin to cut the performance impact. And you have seen some of the release of the -- and the success we have had, help us actually maintain if not last quarter, slightly improve our margin excluding impairment effect, North America land due to the effect of these technology success.

So we will continue to the gas technology and we're looking at our portfolio of business units in North America and making decision to exit or continue and expand or move to a new business model. So too early to say, but yes all option are on table, particularly for the OneStim as it is certainly as you know, they are dilutive business through our old business in North America.

David Anderson -- Barclays Capital -- Analyst

Thank you. Kind of a slightly different question on North America, you highlight some offshore strength, which was a bit of a surprise and granted with some seismic here, but you made a few comments about offshore sort of been a support for the market. Make sure you actually highlighted international. I'm just wondering if this is the harbinger of things to come for offshore in general. And just trying to tie that into the lower subsea Cameron orders this quarter, how do you see that trending over the next few quarters. It sounds like you're somewhat optimistic on offshore, but I don't put words into your mouth there.

Olivier Le Peuch -- Chief Executive Officer

So let me comment on this. So, the review I have is that the offshore market is a market that doesn't complex and expense on a monthly, on a quarterly basis. It's more steady and is more longer -- long cycle and that's particularly true for deepwater. So we have seen growth, recovery -- slow recovery of the boiler for the last 18 months, we have seen faster recovery of the shallow in the last 12 months. So we believe that some of these fundamental which is taking place, not necessarily long term, it's too early to tell, but to the mid and medium term. It is the case. So I believe that the momentum that this market has, here to stay for the foreseeable six to nine months. Beyond that is too early to say. The FID, and the rate of FID for subsea has now basically slowed down. I think some of them have been delayed for technical reason. But we expect the some of the key FID to be approved in the later part of this year or early next year. The subsea or OneSubsea low booking this quarter I think is a matter of scheduling of how and when this booking come in seconds.

We are still having a book to bill ratio year-to-date largely above one for OneSubsea. So we are still confident that the subsea recovery is still in place and will continue to unfold.

David Anderson -- Barclays Capital -- Analyst

Okay. Thank you.

Operator

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

Scott Gruber -- Citigroup -- Analyst

Yes, good morning.

Olivier Le Peuch -- Chief Executive Officer

Good morning, Scott.

Scott Gruber -- Citigroup -- Analyst

Can you provide some color around the outlook for improvement under the new strategy, in EBITDA dollars and free cash dollars, since assets are being removed from the portfolio to optimize around the core, margins will obviously improve. But can you provide some color around your ability to grow cash flow and free cash dollars assuming limited market assistance.

Olivier Le Peuch -- Chief Executive Officer

I think the first and foremost ability that we have to grow, cash flow is to improve the margins, clearly, and that's the first foremost. The next one for cash flow is the ability to improve our working capital efficiency. And both of which we have demonstrated this quarter. Long term, obviously, it depends on the mix and where we are seeing growth and margin improvement. So, I still believe that the fundamental, international growth that we see still in place, where we have a premium on margin compared to North America.

The effect and execution of our strategy scale to fit -- to fix North America and to enhance our net margin in dollar as well as in percentage will both combine to improve our margins. We believe that the asset efficiency that we have improved over the last couple of years due to our transformation combined with modernization of operating platform to -- will continue to have positive effect on working capital efficiency. So you combine all this, we believe that, the ability to deliver cash will only improve and the total -- total cash considering, sort of recession will improve going forward. Do you want to add anything, Simon?

Simon Ayat -- Executive Vice President and Chief Financial Officer

One thing -- you said, you know most of the things -- the issue of the cash flow, definitely it is earnings first and then management of our capital structure and working capital. We normally do very well in the second half as you have seen. Third quarter was $1.1 billion and we anticipate the fourth quarter to be even better than this performance. In terms of next year, we have a plan to continue to be very cautious in our capital deployment. And this would help the free cash flow and continue the performance on our working capital.

Our working capital is normally subject of receivables, inventories. We know what we stand. We always have pockets of collections here and there, and we intend to solve them. And we feel comfortable between our generation of cash from operation and the -- some of the divestitures coming will be more than sufficient to meet all our commitment, including the dividend. One more thing to add about next year, you're going to see a lower SPM investments, because of what we already announced that we going to divest. And we're going to do -- it doesn't require as much as we have done in the current year.

Scott Gruber -- Citigroup -- Analyst

Yeah. That is why you're comfortable mentioning the drop in SPM capex?

Olivier Le Peuch -- Chief Executive Officer

I'm sorry. The question...

Scott Gruber -- Citigroup -- Analyst

Are you willing to mention where SPM capex is going next year?

Olivier Le Peuch -- Chief Executive Officer

Well SPM capex this year is around $750 million [Phonetic] and we anticipate that this will be quite much lower next year. I mean, I don't know exactly where -- we have not finalized all the plants, but you know south of $500 million [Phonetic], $400 million [Phonetic] probably.

Scott Gruber -- Citigroup -- Analyst

Got you. And then one additional question, one tweak to the strategy seems to be a willingness to selectively sell or lease technologies in various markets to third parties, which will then provide the service of wellsite deployment. Can you provide some color on this tweak to the strategy? What is the breadth of this strategy by product line, in which geographies are you looking at deploying the new strategy? And importantly, how do you get comfortable around not creating additional competition in these various markets?

Olivier Le Peuch -- Chief Executive Officer

Yeah, Scott. This strategy regarding technology -- subset of fit for basin, where we believe that in target basins, particular -- only the high volume basin, the capital intensity that is required to fulfill and particularly in the basin. And the high competitiveness by local players are selling both condition that is cutting market access. So we have realized and we have tested this in North America and we are accelerating the opportunity to lead ourself, selected technology that we believe can help us access market that we were not accessing before. So these are two consequence. First is create a new business model, that is -- that relates to our role and our returns.

And secondly, to lower capital intensity as we typically sell these asset, possibly lead. So we don't require capex to expand this marketplace. So well -- typically what is set of local competitor for one, which is -- the case in North America, where if you were to take the drilling space, 150 local competitor that are competing to the drilling services. We expect this to be the case in Middle East whether regional players. And in other part of the world where there are characteristic of high volume basin. When it comes to product line, the drilling is one. Obviously, this is why we started, but will not stop there. We are doing it for some of our perforating equipment in -- and continue to expand and we are currently assessing and as part of the strategy for every product line, the portfolio that we are ready to to sell -- possibly design for sell and or lead to third party.

The digital capacity we have as well helps here because we provide digital services and monitoring of those equipment. So that we are sure that the performance of this technology is up on par with the capacity of this technology. So am I comfortable. Yes, when we put the right tenant commission with those -- those third party company to operate in the defined scope with defined set of customer, we are clear -- and we are becoming increasingly comfortable as well as they are -- as they are successful in deploying our technology, and we are successfully supporting them and then expanding our market access.

Scott Gruber -- Citigroup -- Analyst

Got it. Appreciate the color. Thank you.

Olivier Le Peuch -- Chief Executive Officer

Thank you. Welcome. Thank you.

Operator

Next, we go to Connor Lynagh with Morgan Stanley. Please go ahead.

Connor Lynagh -- Morgan Stanley -- Analyst

Thank you. Good morning.

Olivier Le Peuch -- Chief Executive Officer

Good morning.

Connor Lynagh -- Morgan Stanley -- Analyst

I wanted to stick with the capex team here. In the core oil services business, how would you think about how much you can take out in 2020 spending obviously with production group activity coming down. I would think there would be a decent amount of sustaining capex reduction there, but any thoughts around that.

Olivier Le Peuch -- Chief Executive Officer

I think it's too early to be specific and got it down to the production group at this stage, bounce [Phonetic] on that. We execute the strategy in North America where there are similar volume of production group operating there. And this is too early as some of the activity level is not set yet for North America and popular. Globally speaking, as announced, that we shared before has been 5% to 7% we believe. We believe with the mix of the product line that we have, the recent divestiture of some asset, heavy product line, combined with what we anticipated in North America. I would say almost independently of the strategic execution, we mean that we will stay within the guidance.

Connor Lynagh -- Morgan Stanley -- Analyst

Okay, that's helpful. Thank you. I guess, a broader question here. You've continue to highlight your digital strategy. I think many investors have a hard time thinking through the addressable market or how big a business this could be for you? How do you think about what the opportunity set is in a multi-year view for that business?

Olivier Le Peuch -- Chief Executive Officer

Actually it's a very big market. I think, you said -- long term for the oil and gas industry is one of the biggest market that will grow over the next 5 to 10 years. I believe if I had to judge by the response from oil customers, the desire they have work with us first and the alignment from oil partners industry, a leader in the diesel technology or cost of industry, which are all aligning to our business.

So the price is big. Now, the challenge is to monetize. So as we said, there are three factor and three direction there. One is the -- one is -- you know what revenue in the Sensia -- Sensia has established a leadership into digital workflows, and we believe they will only expand the adoption of DELFI by other customer today is only about a growth. And this expansion remain accelerating the rate of growth of a side as a segment in our portfolio and [Indecipherable] margin that are credit to our business everywhere.

So I believe this will only continue and accelerate. WesternGeco is the data digital -- data digital branch of our -- first line of our business. And I think we are termed and transformed with success, WesternGeco from an asset heavy into an asset light product line last year and we have technologies with an aggressive detailed strategy where we have established data platform GAIA that we have released -- that will become the industry reference by exchanging and monetizing data as you have seen with the announcement of IHS markit joining us on this platform.

And finally, we will continue to deploy digital at the edge in operation. The sense that -- of this ambition for the production space. And you have seen that we are expanding deal production into the ring, you will see that will continue to make announcement in that -- operation and the wireline, latest generation of fleet sampling characterization is becoming full digital and is success and expansion will become a key factor of this success. So this multi dimension is large and it's long-term and we are leading in this space.

Connor Lynagh -- Morgan Stanley -- Analyst

Thank you very much.

Operator

Next, we go to Kurt Hallead with RBC. Please go ahead.

Kurt Hallead -- RBC Capital Markets -- Analyst

Good morning.

Olivier Le Peuch -- Chief Executive Officer

Good morning. [Indecipherable]

Kurt Hallead -- RBC Capital Markets -- Analyst

Thank you for all the great color here this morning. Follow-up question I had -- kind of does sales back to the strategy presentation from a month and a half ago. And in that presentation, you Olivier you clearly stated, the intention to increase international North American margins by at least 500 basis points. And to my curiosity that in the context of that 500 basis point improvement how much of that can be attributed to the improvement in the current contractual dynamics vis-a-vis the execution of the strategy you outlined, specifically, the digital, the fit for basin and the performance models, if you could provide some additional color on how you see that kind of mapping through that be be great?

Olivier Le Peuch -- Chief Executive Officer

No, Kurt I think as I did comment to Angie before I see that the expansion of the performance EPS would gone for two or three buckets. And one of them is short term and is the one addressing is more personal and contractual, is they one addressing under performing business unit and is our ability to operate at the benchmark being performance. And that's the performance transformation we are doing internally that's the self help if you want.

So that is -- is the target target of our -- all of our team and the focus is very high on this. And our personal overview on each of these every quarter for the next, you mentioned the next bucket. And I think the one that will certainly have the most impact the next three to five years will be the mix of digital, fit for basin and technology assets internationally. Without technology assets in Middle East will have digital everywhere and will have some fit for basin from Russia to Latin America from China to Mexico.

So that's what we expect to -- so, I'm confident that as we deploy this over the next few years. These three fit for basin performance model and digital will contribute on this.

Kurt Hallead -- RBC Capital Markets -- Analyst

Right. I appreciate that. And then a follow-up I had was on the, you gave some broad general guidance in terms of business direction. So I'm just kind of curious, when you look at the lower depreciation, it was about a $0.015 impact for the core for the quarter that I guess was only one month. So if you annualize you should get a positive $0.18 per share benefit from lower depreciation. I don't know, it seems to me like the headwinds on the market potentially offset that benefit as you head out into 2020. Do you have any kind of initial perspectives on that. Do you think, my assumption is kind of -- my gut instinct is correct on that?

Olivier Le Peuch -- Chief Executive Officer

I think your maths are correct. I think they are not annualizing this $0.015 will generate more or less the $0.18 net impact in same scope. Now would it be offsetting to the decline. I think it's early too early to say. I think again we are looking at the outlook. As I commented before the outlook in international remain likely positive on both. The outlook on that is too early to call at this point that we reached the bottom in that and we expecting to expect 2020 platform, 2019 or with the regional outlook on -- in 2020 too early to say. So I will remain cautious about -- calling this at this point, but I think your assumption quite strong for the impact in this.

Kurt Hallead -- RBC Capital Markets -- Analyst

Okay, great. And then maybe one last one, I noticed in the press release you mentioned that there was a project cancellation in subsea, was that a project that came through earlier in the year or was it kind of a dynamic.

Olivier Le Peuch -- Chief Executive Officer

Actually no. It's an order booking that was awarded to OneSubsea sometime ago and more than one or two years ago. That was put on the back burner from future FID. And this asset said was actually subsequently sold from one operator to the next and the next. And the next operator, other than the gain on -- decided to cancel and rethink its option for the FID and as such, we have to remove the booking from the -- from the backlog. That's as simple as that.

Kurt Hallead -- RBC Capital Markets -- Analyst

Okay, that's great. Thank you so much for that. Appreciate it.

Operator

Next, we go to Sean Meakim with J.P. Morgan. Please go ahead.

Sean Meakim -- J.P. Morgan -- Analyst

Thanks, good morning.

Olivier Le Peuch -- Chief Executive Officer

Good morning, Sean.

Sean Meakim -- J.P. Morgan -- Analyst

So, Olivier to follow up on SPM. It's been a challenging few months in terms of the macro and Argentina and Ecuador based on your comments of lower capex spend next year, does that suggest you're still confident and affecting the asset sale in Argentina in the near term. And then also just -- you wrote some smaller SPM assets, can you maybe elaborate on their impact in terms of capex and just are we still confident that cash flow for SPM as a whole is exiting 2019 positively, know -- we have some impact on production in Ecuador.

Olivier Le Peuch -- Chief Executive Officer

Yeah. So let me comment one by one. So first, the process of the asset divestiture in, for Mongolia [Phonetic], in Argentina is progressing. We have completed the first phase, where we received actually offer and we are operating a few orders in hand that we are looking, as we speak. So we still do anticipate and we work every step to get signing and closing in the following months.

So, yes we account for this as an impact for 2020. We are not making a decision at this point to divest any other assets. The Ecuador, same [Phonetic] will be the main asset that remain on the SPM portfolio. The other asset that we are listing with -- in the lease are much smaller, where initiated a few years back are not meaningful in terms of the impact on capex not in term of production revenue for SPM. So, in term of cash flow. Yes, our commitment is to operate within cash flow and the cash flow will be positive and improving next year compared to this year considering the divestiture we are making. And we are committed to -- continue to keep it as -- so it will be lower capex and increased cash flow from the SPM contribution.

Sean Meakim -- J.P. Morgan -- Analyst

Thank you for that. That's very helpful. And then, just given the growing importance of digital in your go-forward strategy are you able to quantify the baseline of digital contribution today. I know some parts would be difficult to quantify, but in reference point of the common investor question. And with respect to the margin impact, is it mostly accretion from software, just higher margin product or their internal opex benefit you can get as well.

Olivier Le Peuch -- Chief Executive Officer

Sean, I think we look at it from a digital as a business, that has two characteristics. First, it is something that -- comes from a different industry. And is something that is having high price for all operator. So, we need to be in this business and we believe the rate of growth of digital is here to stay, on the accelerator. So, it will be part of that and that's the one -- the most important factor. The other characteristic is that when we operated well and we have the right IP and operating model there, we have been able to be generating margin that are highly accretive, which has been the case for the last 10 to 15 years with the size. So it will continue to increase, its contribution going forward, but I cannot come out at this point, until we see the 2020 plan and we see that the outcome of all leads and opportunity that we have reached during the last months following the SI score.

Sean Meakim -- J.P. Morgan -- Analyst

Okay, fair enough. Thank you.

Operator

And ladies and gentlemen, our final question will come from Chase Mulvehill with Bank of America. Please go ahead.

Chase Mulvehill -- Bank of America Merrill Lynch -- Analyst

Hey, thanks for squeezing me in. I guess the first one, I'll start on 4Q. I'm just trying to think about the outlook for fourth quarter. I guess 3Q you have $0.43 if we kind of gross it up for the $0.03 of the lower D&A for the full quarter. That's a $0.46 number, and it sounded like North America will be significantly down in the fourth quarter and I wasn't sure about international if it will be up or not from your commentary. But can you maybe help us kind of bridge the gap from that $0.46 number. And how much EPS could potentially be down?

Olivier Le Peuch -- Chief Executive Officer

I would comment on the activity, I will not give quantitative guidance on the EPS at this point. And I will repeat what I shared during my introduction remarks. We -- what we on international is sequentially, we see an anticipated activity decline in rigs and activity can large will be -- will be down due to seasonal effect, winter season in Northern Hemisphere that is here to state up once every year. The magnitude of it will depend on the -- in Russia, particularly in the North Sea, Russia and China to the extent and have this effect.

We don't anticipate to see a tangible, if any year end sales that could offset this partially or fully. And we have some exposure as mentioned as counted before in Argentina. That could also further decline due to the investment climate that has moved there. And finally, you heard about the Ecuador. Ecuador civil unrest that happened, week and after, go on which had some consequence on our operation for about a week, less than a week, where we were -- the production at this stage.

So this is a combination of impact that we foresee for international, that means not activity increase for sure. Now, in the North America I think it's more difficult to exactly point, pin point where the market will end up internal activity, but the rate of decline on the permits. The rate of decline on the risk that has accelerated from July to September. The rate of decision in the last few days and weeks on the pretty tight commitment for the following three months has accelerated. And as such, we anticipate that the year-on-year, the sequential decline from Q3 to Q4 in North America will be greater than it was last year.

Chase Mulvehill -- Bank of America Merrill Lynch -- Analyst

Okay, all right. Understood, all that. And then just coming back to Sean's question on the digital side, it sounds like that you've got a lot of revenue opportunity on the digital side as we kind of move forward over the medium to longer term. Could you talk about which businesses, you see the most opportunity to leverage digital? And then ultimately how meaningful of a revenue opportunity do you think this could be for Schlumberger?

Olivier Le Peuch -- Chief Executive Officer

The one first and foremost the business line that will benefit is the SIS and then WesternGeco which are already fully invested into the digital workflow and digital data marketplace. So that will continue to expand, better growth I think needs to be to be seen, but the momentum is there and the early success, early indications are quite encouraging. The next one, I would say, we happen to have a platform, improve the heat future and some software including [Indecipherable] and drill plan that we announced commercial during this sales run. That when combined give the opportunity to create a digital automation at the scale of a week, full operation, but the scale of set process in drilling rig and this can be productized and applied to platform offshore to platform and the rig in hand. And we are working with operator as we see speak to accelerate this productization and to make it a meaningful impact of the drilling.

And finally production will be building on the success, we are willing to create with JV -- Sensia JV, and working very closely with well information. I will be speaking to the Automation Fair in a month in Chicago and meeting the Board to make sure that we are fully aligned to build the support to this Sensia JV.

Chase Mulvehill -- Bank of America Merrill Lynch -- Analyst

Got it, understood. All right. I'll turn it back over. Thanks.

Olivier Le Peuch -- Chief Executive Officer

Thank you very much. So before we conclude the call today, I would like to reiterate three key points. First, our Q3 performance was very solid. We expect international margins while mitigating the North America land activity headwind. We delivered strong free cash flow and recall safety performance. Second, the new company vision is gaining industry wide acceptance and the initial progress on the strategic execution is very encouraging. Third, we have got the capital to achieve, add an operational license [Phonetic], to deliver, increase the terms, to investment discipline, optimization of working capital and overall margin expansion. Ladies and gentlemen, thank you very much for your participation today. Lia, you may now conclude the call.

Operator

[Operator Closing Remarks]

Duration: 64 minutes

Call participants:

Simon Farrant -- Vice President of Investor Relations

Olivier Le Peuch -- Chief Executive Officer

Simon Ayat -- Executive Vice President and Chief Financial Officer

James West -- Evercore ISI -- Analyst

Angie Sedita -- Goldman Sachs -- Analyst

David Anderson -- Barclays Capital -- Analyst

Scott Gruber -- Citigroup -- Analyst

Connor Lynagh -- Morgan Stanley -- Analyst

Kurt Hallead -- RBC Capital Markets -- Analyst

Sean Meakim -- J.P. Morgan -- Analyst

Chase Mulvehill -- Bank of America Merrill Lynch -- Analyst

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