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North America Onshore Rig Count Flat in 2012, Says Schlumberger

North America's land rig count is expected to be flat this year, with natural gas-directed drilling on the decline while liquids and oil drilling will strengthen, Schlumberger Ltd.'s CEO said Friday.

CEO Paal Kibsgaard discussed the Houston-based operator's fourth quarter and full-year 2011 results, as well as the outlook for 2012, during a conference call with energy analysts.

Schlumberger earned $1.49 billion in 4Q2011, which was 13% higher sequentially and 28% above 4Q2010's profits. Excluding charges and credits, earnings were $1.11/share versus 98 cents in 3Q2011 and 85 cents in 4Q2010. Revenue in the final three months of 2011 reached $10.97 billion, compared with $9.07 billion in the year-ago period. Full-year income from continuing operations, excluding one-time charges, totaled $4.97 billion versus $2.86 billion in 2010.

The oilfield services giant reported big gains from its North American operations, but the biggest upside surprise was in the deepwater Gulf of Mexico, where there was strong demand for high technology services, said the CEO.

Meanwhile, land services revenue in North America appears to be flattening. Low natural gas prices have reversed the onshore drilling trend, and operators are dropping their focus on gas-directed drilling to focus on liquids and oil. Where this will lead in 2012 is uncertain.

"If you look at pressure pumping pricing levels, we continue to see downward pressure," said Kibsgaard. "In the liquids basins the pricing is flat, somewhat up and down on contracts. How that evolves is uncertain. We have seen a flux of capacity of gas into liquids and this could have an impact on liquids pricing. There's not been a downward trend yet. Over the last quarter pricing has been flat, so that basically is where we stand.

"Our view on North American land is that we remain committed to the market. We have a build plan for 12 months that's always flexible. But we remain committed to add capacity, provided we get the utilization that we are looking for. In addition to the North American land market on pressure pumping, we also see signals for demand for horsepower in international markets," where interest in shales and unconventionals is on the rise, he said. The international markets today "require [hydraulic] fracturing capacity. In the event we have to shift capacity internationally, it will be welcomed by the international operations."

But the idea of moving horsepower or pressure pumping capacity to overseas projects is a big "if," said Kibsgaard. "We have basically decided on a build plan for total allocation to North America and we haven't changed at this stage."

Over the past "couple of quarters," the CEO said Schlumberger has seen a shift to more term contracts for oilfield services in North America, with "80% terms for one year-plus. Really, the only place is in the liquids [drilling], where there's been a shift in the market to term contracts and we're well positioned in that sense."

Drilling for natural gas hasn't stopped but it's not gaining any strength, noted the CEO.

"Natural gas markets are well supplied in North America with gas storage well above five-year highs. In this environment, the thin excess oil supply cushion is expected to support oil prices close to current levels, while global demand for LNG [liquefied natural gas] continues to increase."

Kibsgaard also pointed to recent customer spending forecasts, which indicate more spending in exploration and production, as reason for optimism.

In addition to being able to provide more oil rig technology, Schlumberger also has been able to recoup some of its North American onshore costs with increased efficiencies and technology offerings.

"North America land revenue grew in line with the rig count while performance improved through asset deployment and crew efficiency," said Kibsgaard. "Pricing momentum in our Wireline and Drilling product lines continued, though the trend slowed somewhat versus the prior quarter."

Some "uncertainty" exists in 2012 for oilfield services because of the sovereign debt crisis in Europe, "which places downward pressure on [gross domestic product] and oil demand forecasts," said the CEO.

"Against this backdrop we are planning for growth in 2012, while building the required flexibility into our resource plans. We remain confident that any potential reductions in activity will be short-lived and that our competitive position remains strong, given our presence and strength in the international markets and the balance we have established between reservoir characterization, drilling and production services in our North America offering."

Schlumberger's guidance for 2012 capital spending is $4.5 billion, which would be 12.5% above 2011. However, the budget remains "fluid," said Kibsgaard.

"We look at the year in two halves," he said. "In the first half, we will continue to invest at the level that we averaged in 2011 and secure capacity to increase by about 25% in the second half of the year. Whether we go and spend all of the $4.5 billion is also a function of how we see 2013. A lot of additions in the second half of the year could be coming into play and then we'd have recapacity in 2013.

"How we are planning to add in North America versus internationally, this is fluid. It depends on how the two markets evolve. We have the capacity and we are able to add as much capital in 2012 as in 2011, but we are looking at it on a quarter by quarter basis."

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