Cowen – Investor Presentation December 3, 2013 Patrick Schorn 1 Thank you and good morning

Cowen – Investor Presentation December 3, 2013 Patrick Schorn

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Thank you and good morning ladies and gentlemen. I would like to start, by thanking Cowen and Company and James Crandell in particular for the invitation to speak at this event. Today, I would like to provide you with an update on Schlumberger oilfield services operations. I’ll describe the continuous focus to improve our efficiency and execution capabilities as well as the value of integrating technologies & project management. In closing I will address the latest regional business trends.


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But before we start, I would like to point out that some of the following statements are forward-looking. Actual results may differ. Please see our latest SEC filings.


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Schlumberger currently operates in over 85 countries, many of which we have been present in for over 70 years. Throughout this time, we have invested continuously in infrastructure and resources, creating a global deployment platform that is unmatched in our industry. We have maintained a strong commitment to recruiting and developing local talent everywhere we operate, creating both extensive local knowledge as well as deep and long-standing customer relationships. In addition, we have established research, engineering, and manufacturing centers throughout the world, making sure they touch all operating environments and that they remain close to the regional challenges of our customers. So our global footprint is clearly a major advantage for Schlumberger.


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Now turning to the financials. In terms of our market cap, today we are bigger than the sum of our three main competitors by a wide margin. Profitability remains a core value for us and through technology and strategic bidding we continue to command industry-leading operating margins. This outperformance is driven by the quality of our revenue streams and by the strength of our operational execution.


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In 2011 our global margin lead versus the average of our three main competitors was 270 basis points. Focused execution in a challenging environment has now enabled us to extend our lead to more than 800 basis points.


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Our strong margins are driven by the international market, where our lead is now around 10 percentage points, but also by our resilient margins in North America, where we have also taken the lead during the past year.


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Finally, we have maintained a solid track record of generating significant free cash-flow from our operations, which enables us to consistently return cash to our shareholders through dividends and stock buy-backs. In 2011 our free cash flow was equal to that of our three main competitors combined, while in 2012 and so far this year, our free cash-flow has been almost double that of our peer group. Our strong ability to generate free cash flow has allowed us to embark on a new, $10 billion dollar buy-back program as announced in July. We will also continue to review dividend levels on an annual basis.


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Another key aspect of our size advantage is the breadth of our technology offering, which today includes 15 product lines and almost every aspect of the exploration, drilling, and production cycle. According to the latest Spears survey, we hold market leadership positions in 10 of our 15 product lines. Each of our remaining five product lines has specific plans to reach market leadership in its respective domain. This includes broadening their technology portfolio as well as expanding their footprint. A number of these opportunities are found in our Production Group, where we now have particular focus. Another significant benefit of our broad offering is the balance it offers with respect to both technology and geography. In 2012, our Reservoir Characterization, Drilling, and Production Groups each represented about one-third of our global revenue, while the split between our four geographic operating areas was also quite even. This technology and geographic balance provides a solid platform to pursue market opportunities anywhere in the world. It also provides insulation in the event of market headwinds, as illustrated by our recent outperformance in North America.


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Lastly, the span of our technology offering gives us a clear advantage in terms of providing project and workflow integration to our customers. Our size has also enabled us to establish a diverse customer base. In 2012, we served a total of 4,000 customers worldwide—with nearly half of our revenue coming from independents, and the remaining share evenly split between internationals and nationals. This large and diverse customer base and the long-standing relationships we have all over the world offer a range of growth opportunities. The strengths of our business presence in the Middle East and Russia are examples of this. I will elaborate more on these growth drivers later in the presentation.

Regarding activity and resources, our combined product lines now account for more than one million operating hours per month—which is the equivalent of having between one and two product lines working each day on every active rig in the world. The scale of our operations, combined with the breadth of our business offering creates a massive reach in terms of market intelligence and understanding of customer needs and market opportunities.


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To handle this activity we operate around 150,000 mobile assets, including vessels, vehicles, surface equipment, and downhole tools. We support our operations from 2,500 facilities including offices, warehouses, and maintenance shops. In addition, a total of 125 R&E centers covering research, engineering, manufacturing, and sustaining also provide technical support. In addition to this internal support structure, as part of our global operations we manage some 80,000 suppliers and an annual spend of more than $22 billion dollars. Our global operations network is linked together by our transportation system that handles 80,000 shipments every month, and by our IT business systems that handle more than 150,000 transactions every day. Our business runs on a global IT network connecting our facilities with 800 active well-site units, allowing for secure real-time collaboration with our operations support centers and with our customers and suppliers. This, coupled with the fourth largest private installation of computing power in the world, at 27 petaflops, allows for new levels of modeling and simulation providing answers to some of the toughest challenges in our industry. Finally, we now employ approximately 120,000 of the best women and men in the industry. Our workforce remains unique in terms of diversity, capability, and experience, and through our recruiting, training, and development programs we maintain a strong and deep pool of talent with an average age of 36 years. We bring this massive ecosystem together through a unique organization that has grown from offering a single activity in wireline logging, more than 85 years ago, to providing the broad range of services that we know today.


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In 2010 we created a unified shared services organization spanning the support activities that were previously managed by the individual product lines, including supply chain, facilities, distribution, and transportation. Again, the goal was to create an organization that would enable us to fully leverage the scale of these support activities and elevate the performance of this part of the organization, learning from the best companies in other industries. Today we have fully centralized our supply chain function through a strong category management-set-up, an active supplier management-interface, standardized contract management, and a professional buyer network. The benefits of this organization are already starting to pay off, as we saw in North America pressure pumping in 2012, for instance.


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In addition, we have initiated a complete re-structuring of our global distribution, warehousing, and maintenance network. The aim is to gradually move away from our current decentralized set-up, where each business unit is fully self-contained, to an organization where more of the assets and inventory is owned, stored, and maintained at a regional level. This should help us better leverage our size and expertise, and the sharing of resources. This organization will be further supported by our global transportation network, which is currently undergoing a similar upgrade to enable quicker and more cost-effective movement of assets, materials and spares.

Since its creation in 1995, our IPM product line has assembled a broad range of project management and integration capabilities, including rig management, technology integration, risk management as well as third-party contractor management. Today we operate over 65 projects globally with a rich project backlog. Our offering covers basic project coordination, turn-key well construction, production-intervention campaigns, as well as production-incentive contracts.


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These production incentive contracts are managed through the Schlumberger Production Management (SPM) sub-segment of IPM. The SPM business is one of the fastest growing parts of IPM. We currently have more than 150,000 barrels per day of production under management. In the last couple of years, we have seen a significant increase in the number of integrated tenders issued by our customers, reaching as high as 30% of the total tender volume, so far in 2013. This trend appears to be driven by a desire among some customers to reduce the number of suppliers involved in each project, and to instead seek closer partnerships with companies that have a broader offering as well as the ability to handle a significant part of a project’s coordination and integration.

We generally find that the real integration value of our IPM projects is created when we get our various product lines to work together seamlessly, spanning the traditional silos or dividing lines in terms of work scope, people and technology.


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Going forward, we see both a strong need and a clear opportunity to drive costs out of the E&P value chain through significant improvements in integration, quality and efficiency. Given the breadth of our technology offering, the size of our operations and our integration and teamwork capabilities, we are in an excellent position to capitalize on this trend.

The need for improved levels of integration, quality and efficiency goes hand-in-hand with the E&P industry’s ambitions to discover reserves in new frontiers, particularly in deepwater. More than half of all oil and gas reserves discovered worldwide over the last 10 years have been offshore and the majority of large finds have been in water depths of more than 500 m. It is estimated that approximately 200 new deepwater fields will enter production over the next four years. By 2020, production from deepwater fields will represent about one third of total offshore production, representing about 10% of total global oil supply. Deepwater well capex is expected to grow from close to $45 billion dollars to significantly over $100 billion dollars by 2020, with the majority of this growth taking place in the Atlantic basin.


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On the basis of recent successes, we can expect many of the new exploration and development projects to be in the more remote areas of the world. These environments can present logistical difficulties, often compounded by complex geological and reservoir conditions. For example, we are seeing an increasing proportion of higher pressure and temperature wells, adding to the challenges of operating in deepwater environments. Tackling all of these factors puts our industry into a very high cost environment with drilling spread rates often in excess of $1 million/day. In such environments there is clearly no room for failure. However, despite the huge costs, some operators have reported non-productive time levels in their deepwater drilling operations above 20%. In addition, the cost of not reaching the targets can equate to the failure of an entire exploration program.


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Improving success rates in deepwater operations requires a focus on three major elements: people, process and technology. It is essential to develop the competency of field crews and teams of petrotechnical experts to support deepwater operations, and establish ways to leverage their expertise. Planning and risk management assessment tools are being adopted to ensure readiness for complex deepwater projects, particularly important for operational startups in remote areas. Going forward, the integration of services will play an increasing role in de-risking operations. For example, Seismic-guided drilling, which combines logging-while-drilling data with the seismic model in real time to reduce depth uncertainty and identify over-pressured zones in front of the drill bit. By leveraging advances in computing power, the seismic model around the well can be reimaged while drilling, enabling the drilling program to be modified to achieve its objectives while avoiding problems and operational delays.


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As mentioned earlier, our international presence combined with our large and diverse customer base, offers a range of growth opportunities. In Saudi Arabia and Iraq we have seen continued drilling activity growth, market share gains, and the addition of resources to service newly arrived drilling rigs. In Russia & Caspian, our revenue reached an all-time high for the region during Q3. China saw strong growth in the West China land market, with conventional and tight gas driving the activity. In Q3, we started Yanchang, our first SPM project in the country, in the Ordos basin. Australia growth continued, and our recent wins in hydraulic fracturing further strengthened our position on land. Also, our IPM coal bed methane project in Queensland is progressing well.


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Let’s then turn to the business outlook, where first of all we maintain a positive view on 2014. From a macro perspective, we see a relatively stable overall picture, where the positive signs on the oil demand side are balanced by an easing of the supply situation, as Iranian crude exports potentially resume at some level in the coming year. While it is still early to comment on specific numbers for next year, we continue to expect growth in E&P spend in both the North American and International markets, with the key growth regions for Schlumberger in 2014 continuing to be the Gulf of Mexico, Sub-Sahara Africa, Russia, the Middle East and China. Given the strong focus on cash flow from parts of our customer base, we could see a shift in development spend from large infrastructure projects towards more well related capex, which should in general be a positive for our business. With respect to the exploration spend, we still foresee growth in 2014, driven by exploration and appraisal drilling activity, which will benefit our high margin & high market share characterization & drilling product lines.


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We further expect a flattening of the overall seismic spend in 2014, and we are so far seeing lower than expected multiclient sales in the fourth quarter. Looking closer at the remaining business environment in the fourth quarter, we are seeing the expected seasonal slowdown in activity in Russia and China, while the negative pricing trend in North America land continues in most of our product lines. During November we had a temporary shut-down of our operations in South Iraq, due to a security incident, which we expect will have an estimated impact on our earnings per share (EPS) for the quarter of 2–3 cents per share. With strong support from the authorities, we are almost back to normal activity levels at this stage, and expect to see continued strong growth for our business in Iraq next year. So, as 2013 is drawing to a close, we are actively preparing for 2014, where we again look to further extend our trend of outgrowing our competitors in terms of earnings per share, while continuing to focus on what we control, namely the quality and efficiency of our execution.


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As stated by our CEO, Paal Kibsgaard, we plan to continue improving our performance by working toward the following high-level goals. First, in 2011 and 2012 we posted growth in earnings per share of 38% and 16%, respectively, on a pro-forma basis. In the years ahead, our overriding goal will be to continue generating double-digit growth in earnings per share. Second, in the past couple of years we have shown steady improvement in operating margins, and building on this, we have a clear ambition of bringing margins back to the levels of the previous cycle. In order to achieve this goal, we will count on some improvement in general pricing, but also on significant contributions from the introduction of new technology, improvements in operational efficiency, reduction in cost of ownership of our field assets, and lower unit support costs. Third, we will continue to focus on improving return on capital and free cash flow from our operations to fuel the return of cash to our shareholders, both in terms of stock buy-backs and dividends. All of these endeavors, together with our continuous focus to improve our efficiency and execution capabilities, and the value of integrating technologies and project management, give me the confidence in our ability to deliver on our potential going forward.


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Thank you very much. I will now be pleased to answer questions.

Cowen – Investor Presentation December 3, 2013 Patrick Schorn 1 Thank you and good morning

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Transcript of Cowen – Investor Presentation December 3, 2013 Patrick Schorn 1 Thank you and good morning