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Schlumberger Shale Technology Helps to Lift North American Revenue

North America proved a winner for Schlumberger Ltd. in the third quarter, with revenue rising 7% sequentially, an all-time high, and margins expanding 57 basis points (bps), or 0.57%, to reach 20.3% on a year/year basis. New shale technology tested in several basins helped to lower drilling costs, and it's now being given a look in other areas.

The U.S. land market remained relatively flat sequentially, but the seasonal recovery in Canada was "more or less" on par with last year, CEO Paal Kibsgaard said during a conference call Friday. "The downward pricing pressure continued in most product lines in the third quarter, including pressure pumping, although at a slowing rate."

He told analysts that the oilfield services operator had come a long way since it began transforming its North American land business three years ago "to the point that we are now starting to pace in North America land just as we do in the rest of the world in terms of our new technology deployment, as well as financial results.

"As an illustration of this, we activated four additional hydraulic fracturing fleets in U.S. land during the third quarter, following a number of recent contract wins. As a result, our third quarter stage count increased by 7% sequentially."

The operator also posted solid sequential growth driven by new technology sales in the Lower 48 states. Offshore Eastern Canada, the operator successfully completed an isometric survey in early September, and activity continued to be strong in the U.S. Gulf of Mexico, with minimal impacts from the hurricane season so far this year.

"Over the past 12 months we have continued to actively promote our shale reservoir workflow to the market with a strong focus on optimizing both well locations as well as completion design," said Kibsgaard. "As for these efforts we have introduced a data consortium business model, where multiple customers with neighboring acreage can contribute reservoir and production data and then co-fund field and well studies as well as the construction of 3-D reservoir models for the shale plays.

"In return each customer receives all the findings and conclusions from the consortium studies in addition to the reservoir model covering their acreage. We have so far conducted three such studies with very interesting findings and conclusions and these studies together with our technologies and workflows has helped to significantly improve the well performance for the participating customers."

The "major conclusion we have confirmed is that in order to optimize production, recovery and costs of the shale developments, there is a clear need to shift focus from the level of a stage, down to the level of the individual perforation clusters that make up a stage." On average, between 30% and 70% of the perforation clusters do not contribute to production. "This means that we are not effectively addressing the available shale reservoir throughout the entire length of the stage and that we generally over-fracture a subset of the perforation clusters. Based on these findings, we are actively working on a number of technologies that target this opportunity."

In the latest quarter, Schlumberger started field testing one of these new technologies, a novel solid-based diversion technology, which was added to the fracturing (fracking) fluid at various times during the pumping of its stage, which effectively fielded off the clusters that were taking frack fluid.

"This allows us to access the perforation clusters that are yet to be properly fractured," said Kibsgaard. "This new diversion technology has two primary applications. First, in improving production and recovery by ensuring that more perforation clusters are accessed within a traditional stage; and second, in lowering completion costs by increasing the length of the stage, thereby reducing the number of frack plugs installed and subsequently milled in the well."

Diversion technologies aren't new to fracking, he said. They've been around the industry in various forms for a long time, but they've so far failed to show tangible or consistent results. The new approach by Schlumberger "is in the robust design and engineering of the diversion pill and the fact that field test results so far are showing very promising results.

"We plan to continue our field testing of this technology in the coming quarters and in addition, we will also evaluate the technology as a potential way to re-fracture existing wells that are underperforming in terms of production.

"In parallel with our growing new technology penetration of the North American shale market, we have been gaining market share in hydraulic fracturing in recent quarters at what we consider acceptable incremental margins. These market share gains led us to activate the four additional frack fleets..."

Only a "subset of our fleet has been upgraded" in North America "but we expect that to our normal maintenance schedule we will have the entire fleet upgraded by the end of 2014. This upgrade will be fully covered through our ongoing operating costs and involves no capital investments."

The underlying economic trends in the United States "are positive and the level of macroeconomic uncertainty was reduced in the near-term following the temporary resolution of the fiscal debate," said the CEO. "Demand for oil in 2013 has again been revised upward and current estimates for 2014 point to even stronger growth in demand."

Schlumberger sees increased customer activity and more spending among exploration and production companies, he said. "Within this landscape, we remain positive on the outlook for the industry."

Income from continuing operations during 3Q2013 was 24% higher year/year at $1.71 billion ($1.29/share) and was 12% more than in 2Q2013. Revenue climbed to $11.61 billion from $10.50 billion, and improved from 2Q2013's $11.18 billion. Oilfield services revenue was up 11% year/year and 4% sequentially to $11.61 billion. Pretax operating income was $2.50 billion, 20% higher than a year ago and 10% more than in the second quarter.

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