Schlumberger Q3 2017 Earnings Conference Call Transcript (SLB)

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Schlumberger Ltd. (NYSE: SLB)

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Q3 2017 Earnings Conference Call
Oct. 20, 2017, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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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 should require assistance during the call, please press star then zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Simon Farrant. Please go ahead.

Simon Farrant -- Vice President, Investor Relations

Good morning, good afternoon and welcome to the Schlumberger Ltd. Third Quarter 2017 Earnings Call. Today's call is being hosted from New York following the Schlumberger Ltd. opening.

Joining us on the call are Paal Kibsgaard, Chairman and Chief Executive Officer. Simon Ayat, Chief Financial Officer, and Patrick Schorn, Executive Vice President New Ventures. 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 relate comments on our third quarter financial performance, before Patrick reviews our results by geography. Paal will close our remarks with a discussion about technology portfolio and our updated views of the industry macro. However, before we begin I would like to remind the participants that some of the statements we are making today are forward-looking. These statements involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. I, therefore, tell you [inaudible] [00:01:23] the 10K filings and other SEC filings. My comments may also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures can be found in our Third Quarter Press Release which is on our website.

Finally, after our prepared remarks, we ask that you please limit your question and one related follow-up during 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 -- Executive Vice President and Chief Executive Officer

Thank you, Simon. Ladies and gentlemen thank you for participating in this conference call.

Third quarter earnings per share, excluding charges and credits, was $0.42. This represents an increase of $0.07 sequentially and $0.17 when compared to the same quarter last year. During the quarter we recorded $0.03 of Cameron merger and integration charges. Our third quarter revenue of $7.9 billion increased six% sequentially. Pre-tax operating margins increased 103 basis points to 9.2%.

Highlights by product group were as follows. Third quarter as a [inaudible] [00:02:43] characterization revenue of $1.8 billion increase 1% sequentially while margin increased 56 basis points to 17.6% primarily due to strong well activity largely in Russia and Central Asia. Drilling group revenue of $2.1 billion increased by 1% sequentially, which margins of 14.2% were essentially flat as directional drilling on land in North America continued to improve. Production and group revenue of $2.9 billion increased 15% sequentially while margin expanded by 62 basis points to 9.8%. These results were driven by strong pressure pumping activity in North America land.

Cameron group revenue of $1.3 billion increased 3% sequentially while margin increased 61 basis points to 13.8%. These results were largely driven by higher product sales in surface systems in North America. One sub-sea margin exceeded the 20% for the fifth straight quarter. The book to bid ratio for our long cycle business was 0.8 in Q3. The effective tax rate, excluding charges and credits, was 18.4% in the third quarter compared to 18.9% in the previous quarter. We generated $1.9 billion of cash flow from operations during the quarter. This included a federal tax refund in the U.S. Working capital consumed $134 million of cash largely due to the increase in activity. Working capital also reflected the payment of $114 million in severance during the quarter. We remain on-track to achieve our cash flow generation target for the year.

Our net debt improved by $385 million during the quarter to $12.2 billion, we ended the quarter with total cash and investment of $5 billion. During the quarter we spent $98 million to repurchase 1.5 million shares at an average price of $66.04. As we previously highlighted, we have reduced our buyback activity during the quarter in light of the pending Oneston and EDC transactions as well as various SPM opportunities. Other significant liquidity events during the quarter included $600 million on CAPEX and investment of approximately $165 million in SPM projects. During the quarter we also made $693 million of dividend payments. Full year 2017 CAPEX, excluding SPM and multi-client investments, is now expected to be approximately $2.1 billion.

And now I will turn the conference over to Patrick.

Patrick Schorn -- Executive Vice President New Ventures

Thank you Simon, and good morning everyone.

Our third quarter results were solid driven by the strength of the North American land market and by growth in key international markets like Russia, the North Sea, and Asia. Elsewhere activity was largely flat sequentially. The quarter's performance was led by the production group with strong revenue growth in North America as hydraulic fracturing activity continued to increase. The Middle East also contributed to the growth of the group through increased activity on unconventional resource development projects. Reservoir characterization group results were higher on solid summer drilling campaigns in Russia and the North Sea. Although exploration worldwide remained very weak. The drilling group also improved driven by stronger directional drilling in North America which more than offset the completion of the integrated drilling services project in the Middle East and Mexico. At Cameron one sub-sea continued to deliver strong margins for a fifth straight quarter, at the same time, Cam Shale Fluid Delivery and Fracturing Services are now deployed on about half of all Schlumberger fracturing drill in North America realizing one of the targeted synergy benefits of the acquisition.

Looking at North America in detail, revenue grew 18% sequentially driven by continued growth for both our production and drilling-related businesses. With our hydraulic fracturing revenue increasing 42% sequentially. Over the past two quarters, we have more than doubled the number of active frack fleets in North America and we have at present deployed close to all of our idle capacity in preparation for the additional capacity that will become available after closing the one stem transaction with Weatherford. While the strength in our hydraulic fracturing activity combined with market share gains and continued price in fraction drove significant sequential revenue growth for the production group in North America land, it also inevitably led to some transition-related costs and inefficiencies resulting from the rapid ramp-up and activity which impacted incremental margins. However, this impact will abate in the coming quarters.

The drilling group product lines also benefited from the continued growth in North America land rig activity in the third quarter. Demand for our advanced rotary stable systems remained at sold-out levels as our customers continue to move to longer laterals. Given the demand for our drilling technology offering, we have ramped-up manufacturing capacity and will dedicate more CAPEX toward the North America land drilling market in the coming year.

Before I comment on the international markets, I would like to update you on our SBM projects in North America where we continue to make inroads in the third quarter. After one year of operations on the SM Energy project in the Powder River Basin, we are currently drilling and completing the 11th well. The production wells we have designed, drilled and completed all produce in the top quartile of the field, driven by optimized well placement and an engineered approach to completion and stimulation. Based on the success of the partnership between SM Energy and SPM we are making steps to develop the business model further in cooperation, alignment, and scope.

As announced at the second quarter, we have also secured a new SPM project with Torgerson in western Canada where we started up operation in August with four wells drilled so far. Yesterday, we announced that we together our partner Torgerson also have acquired the neighboring Palliser block making this project the largest in scope within our current portfolio. The SM Energy and Torgerson projects demonstrate the SPM opportunity set that is available to us in North America. These projects also show how we are effectively diversifying and building out our SPM portfolio from the initial start in Malaysia, Romania, and Ecuador where we created the technical and commercial expertise that today serves as the foundation for this new and exciting part of our offering.

Internationally, revenue was up 2% sequentially excluding Cameron where the long cycle businesses, as expected, are still seeing noticeable sequential declines. Europe CIS, Africa area revenue was 7% higher sequentially including Cameron due to strong summer activity in Russia and Central Asia, the United Kingdom and continental Europe, and in Norway and Denmark. In Russia and Central Asia, land activity was very strong during the summer driven by well construction services, wildland logging, and artificial lift system sales. Russia is a strong market that steadily adds reserves through the drill bits. Our performance continues to benefit from the extensive investments we have made in the country in personnel, infrastructure, local manufacturing and support over the past 15 years.

Activity in West Africa remains stable in the third quarter with limited additions to the rig count, however, project planning and tendering was a two-year high with new offshore projects start-ups anticipated in early 2018. These projects are clear opportunities for our integrated service product lines and we continue to see an increasing in interest for performance-based drilling contracts in shallow water including the jack-up rig market.

In North Africa, activity remains low although we were able to return to drilling services and continue well intervention operations in Libya as security improved during the quarter. Middle East and Asia area revenue was up 1% sequentially excluding Cameron as strong production and drilling group in the Saudi Arabia and Bahrain, Far East and Australia, and South and East Asia geomarkets was largely offset by the completion of integrated drilling services project in Iraq.

Activity growth in Saudi Arabia was driven by improved productivity in our unconventional resources project which enable us to complete a higher stage count. However adverse weather which disrupted western geocode land seismic activity partially offset these gains.

In Asia, activity strengthened in Indonesia on increasing rig count and market share, while Australia benefited from higher demand for hydraulic fracturing and drilling services. China improved with increased production services and higher seasonal activity and new technology deployment for shale and type gas development.

Revenue in the Latin America decreased 5% sequentially excluding Cameron mainly due to lower multi-client seismic sales and the completion of integrated drilling services project in the Mexico and the Central America geomarket. Revenue in the North and South Latin American geomarkets was essentially flat with previous quarters with stable SPM project activity in Ecuador and as we prepare to start-up our YBFSBM project toward the end of this year.

As there has been a lot of attention around our SPM activity in Ecuador, including recent reports with incorrect analysis and conclusions, let me close my remarks by clarifying where we currently stand. During the third quarter, we reached an agreement with our partners Petroamazonas and the government of Ecuador to settle our overdue receivable balance in the country with the first payment milestones related to these discussions already completed during the quarter.

Based on a joint review of the future development and investment plan for the field, we have also revised the tariff relating to the Shushufindi contract and added a future sovereign payment guarantee. This was done to ensure that this long-term contract remains viable for both parties going forward. It is also important to point out that on a going forward basis, the new terms of the Shushufindi contract still meet our established investment criteria. At present, production from the Shushufindi field has been restored and is now in line with the current reservoir performance potential.

I now hand the call back to Paal.

Paal Kibsgaard -- Chairman and Chief Executive Officer

Thank you, Patrick.

Before I comment on the business outlook, I would like to talk about technology, and in particular how we continue to build out our offering to create an unmatched upstream technology platform where the individual products and services have the industry's lowest cost of ownership and where the collective offering is ready-made for broad-based system integration. This direction will first ensure that we become even more competitive in the markets where the prevailing business model is focused on lowest price for basic stand-alone products and services. And second, it will enable us to better serve the growing number of customers who favor and performance-based contracts which is directionally where we see the industry heading. This includes extending our ownership of hardware, software and domain expertise into new market segments, as well as teaming up with companies like Google and Microsoft to capitalize on the latest advances in digital technology enablement.

What is the basis for our pursuit of technology system integration and why do we see hardware ownership as a critical element of this strategy? Today's broad and complex EMP industry workflows are still predominantly enabled by discrete and fragmented products and services with the dividing lines between the various work packages defined by our customers contracting framework which was established decades ago. These artificial dividing lines made sense at the time of creation when the technology systems were made up a limited number of isolated hardware building blocks and the value of software and data was still nascent.

With the complexity of today's oilfield operations and the advances made in other industries in terms of total system performance, it is clear that replacing our industries fragmented approach with a new focus on complete technology systems holds a massive performance upside. In response to this, we have over the past seven years continued to build out our technology offering in terms of hardware, software, and domain expertise, where we today have the ownership and technical capabilities to develop these complete technology systems driven by the following key beliefs.

First, we believe that innovating across the artificial dividing lines of today's work packages to create hardware technology with a broader scope, a smaller footprint, and fewer interfaces holds huge upside potential in terms of both hardware costs and performance. The way we are integrating and innovating around the drilling multiple assemblies is an example of this. Second, we believe that the next step change in performance will come from developing complete technology systems based on streamlined and redefined end-to-end workflows which integrates all hardware and software components. What we are doing with the rig of the future is an example of this. And third, we believe in order to maximize the performance of the EMP industry workflows it is essential to leverage the latest advances in digital technologies. We achieve this by making these enabling technologies an integral part of the new hardware and software technology systems as opposed to attaching them on top of the outdated and fragmented technologies of yesterday.

What we are doing with DELFI, which was introduced during the third quarter, is an example of this. DELFI is our new cognitive EMP environment that leverages the latest advances in data security, analytics, machines earning, high-performance computing as well as teamwork and collaboration to drive total system performance. The DELFI environment provides new way of working for the effort teams by strengthening the integration between the technical demands and by enabling our customers and software partners to add their own intellectual property and workflows to the system. With the launch of DELFI, we have also deployed an EMP data link on the Google Cloud Platform comprising more than 1,000 previous seismic surveys, five million wells, one million well logs and 400 million production records from around the world demonstrating a step change in system scalability. DELFI will ultimately cover all industry workflows, however, the initial focus is on drilling and well construction. In this respect, the drill plan and drill ops solutions will in the coming quarters be introduced to the market and this combined with our downhole hardware and the rig of the future will, under the one-grid offering, create an unprecedented step-change in drilling performance. This summarizes the strategic rationale behind our pursuit of technology system integration and also explains why we see hardware ownership as a critical element of the strategy.

Our commitment to technology leadership is stronger than ever as can be seen by how we have advanced our technology strategy during the downturn of the past three years. We are now ready to capitalize on these investments in close collaboration with our customers.

Let me next turn to the business environment. With the reduction in global oil inventories in the third quarter, clearly demonstrates that the oil market is now in balance which is creating the required foundation for a further increase in the oil price and the inevitable growth in global EMP investments. While the timing and pace of the pending industry recovery is still not completely clear, we now see a number of converging market factors that make us increasingly positive about the outlook for our global business. First and foremost, the growth in oil demand continues to be very strong and importantly the upward growth provisions in 2017 were primarily seen in the OACD countries. The demand growth outlook for 2018 is again expected to be north of 1.4 million barrels per day and is further supported by upward revisions in global GDP growth clearly suggesting that the demand side of the oil market equation is on a very solid footing.

Looking closer at the global oil inventory we also believe that the current situation is more positive than what is reflected by the market. Today global inventory levels are down to 64 days of full recovery, and the North American stocks are already down to 2014 levels. Ground crude which is now in backwardation is seeing faster inventory growth and stocks are already approaching the five-year average.

In North America land where the EMP companies have added significant CAPEX over the past year, the production growth is, so far, falling short of expectations driven by supply chain inflation, operational inefficiencies, and the need to step out from the tier one acreage. This has led to a moderating investment appetite where the previous pursuit of production growth is now being balanced out with an equal focus on generated solid financial returns and operating within cash flow. This moderation can be seen in the flattening trend of the U.S. land recount during the third quarter. It is also reflected in our customer's 2018 activity outlook. The more tempered activity outlook for U.S. land combined with the short-cycle nature of the business has an immediate impact on the outlook for production growth which, for 2017 and 2018, has been revised down by 100,000 and 500,000 barrels per day respectively. This clearly has a material impact on the global supply and demand balance.

From the OPEC side, compliance with the stated production cuts has been better than expected. At the same time, comments from several of the key OPEC Gulf countries and from Russia suggest that an extension of the existing production cuts beyond the current agreement is a possibility. Although this may ultimately not be needed.

Looking at the ongoing activity and investment levels in the international markets outside OPEC Gulf, and Russia, we have so far seen very limited growth since we reached the bottom of the cycle in the first quarter of this year. However, we are seeing signs in many parts of the world of conventional line and off-shore projects now being prepared for FID and the total number of FIDs this year is double that of 2016. It is also worth noting that our overall tendering activity in the international markets is also up by over 50% in 2017 compared to last year measured in total contract value. We expect these positive trends to strengthen further in the coming quarters. Based on a combination of all these factors we are turning increasingly positive on the overall outlook for our global business. It is still early to say what the specific impact on the 2018 EMP spend will be as our customers are now in their planning process. We do expect activity tailwinds in most parts of the world in 2018.

In the meantime, we are fully focused on delivering industry-leading products and services to our customers. We also remain opportunistic with respect to making further strategic moves to position Schlumberger at the forefront of the industry as the global activity upturn slowly but surely emerges.

Before we open up for questions which will likely initially be focused on SPM, let me again reiterate the rationale and objectives behind our SPM investments which has not changed over the past two years. SPM will not alter the face of Schlumberger, it will simply complement our core business where the objective is to grow SPM from the size of the product line today to the size of a group over the next five to seven years. Granted, SPM has a different risk profile compared to our core business but different does not mean higher. The biggest risks to our full cycle returns in the core business is first the huge cost of scaling and scaling down capacity in an increasingly volatile business environment. Second, failing to adjust our business approach in some of the large but commoditized land markets around the world. Faced with these challenges we have concluded that a strategy of doing nothing new is simply not a strategy. The SPM business model and contracturation significant mitigates both of these core business risks while in return we take on the reservoir risk and in certain cases higher counterparty risks. Our track record over the past 20 years of SPM activity shows that we are very good at managing the reservoir risk, and we are also getting increasingly good at managing the counterparty risk as demonstrated by how we have resolved the current and future payment situation in Ecuador.

In short, SPM helps mitigate some of the major risks in our core of business. At the same time, we know very well how to manage the new risks we take on through the SPM model to the point where we see SPM in combination with our base business actually lowering our overall risk profile rather than increasing it. In terms of returns, we have disclosed that over the past five years the SPM business performance is highly agreeative to both our operating margins and return on capital employee. It should, at least, attract a corresponding multiple to our core business. To realize our stated growth objectives for SPM we are pursuing investments and new projects. The announcement made yesterday is in line with this strategy. Lastly, let me also point out that SPM remains a small part of what we do as a company and that the core of Schlumberger continues to be focused on our technology leadership where there are currently a lot of exciting things happening.

...

With that, let's open up for questions.

Questions and Answers:

Operator

Okay. Ladies and gentlemen, if you'd like to ask a question, please press star then one on your touchtone phone. You will hear a tone indicating you have been placed in queue. You may remove yourself from queue at any time by pressing the pound key. If you are using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question please press star one at this time.

And one moment please for your first question. Your first question comes from the line of James West from Evercore ISI. Please go ahead.

James West -- Evercore ISI -- Analyst

Hey, good morning Paal.

Paal Kibsgaard -- Chairman and Chief Executive Officer

Good morning James.

James West -- Evercore ISI -- Analyst

I'm gonna skip the SCM question. I'll let somebody else go after that since I'm not very comfortable there. I know that returns are agreeative.

What I want to talk about, and you highlighted a lot of this in your prepared commentary is international. Grant that you closed in on 60 here, oil market fundamentals clearly better than they were a quarter, or quarter two ago. Which markets and I know you don't want to get into numbers yet because it's budgeting season, etc. Which international markets that are basically rock-bottom right now do you see turning the fastest as we go into the back end of 18, 19?

Paal Kibsgaard -- Chairman and Chief Executive Officer

It's again, a bit difficult to say, Rob. But if we just go through the various parts of the international market, we were actually quite pleased with the activity we saw in Q3 in Europe, North Sea in particular as well as in Russia. The Gulf part of the Middle East remains also very solid. Then, in addition to that, you have Africa and Asia where we saw basically flattish activity in Africa and we had some small encouraging signs of growth in Asia. While also Latin America was flattish. I would say, going forward, I still think that the markets that would lead is likely going to be Russia, Europe with the North Sea, and the Middle East. But there are some emerging positive signs, I would say, in Asia. While Africa and Latin America is still looking flattish as of now. Early to say, but for all markets I think we are at bottom and the encouraging signs as I mentioned in the prepared remarks is that the number of FIDs overall this year is up by about 50% lag on activity but it's a positive sign as well as our tendering activity which is also up in total contract value this year by over 50%. There are really encouraging signs to be seen.

James West -- Evercore ISI -- Analyst

Okay. Great.

As we think about those markets that are now starting to show signs of life, or will show signs of life here shortly, is the pricing environment starting to finally stabilize out?

Paal Kibsgaard -- Chairman and Chief Executive Officer

As always, every contract bid any part of the world is competitive. There is still pricing pressure and pricing challenges for all the new contracts we bid, but I would say the downward trend of pricing is slowing significantly, which I think is in line with the fact that we see activity having bottomed and is probably starting to head in the opposite direction. Pricing headwinds at this stage is not a huge issue for us in the international market.

James West -- Evercore ISI -- Analyst

Great. Thanks, Paal.

Paal Kibsgaard -- Chairman and Chief Executive Officer

Alright. Thank you, James.

Operator

Your next question comes from the line of Angie Sedita from UBS, please go ahead.

Angie Sedita -- UBS -- Analyst

Thanks. Good morning guys.

Paal Kibsgaard -- Chairman and Chief Executive Officer

Good morning.

Angie Sedita -- UBS -- Analyst

Maybe we could start with a lob for you and for the softball. Thoughts on Q4? Your comfort may be around consensus or anything you can talk about at a high level on the revenue or margin side.

Paal Kibsgaard -- Chairman and Chief Executive Officer

Right. For the Q4 outlook, we generally expect a continuation of the underlying trends that we've seen in the third quarter moderated somewhat by seasonality. Right? In North America land, we do expect to grow but I think the growth rate will slow partly due to the flattening rate fact, partly due to the fact that we have deployed most of our frack equipment and also the pending holiday season. I would say that some growth in North America land but obviously not the same rate as what we've seen in previous quarters, and the international markets we expect some modest growth in both MEA and Latin America, but due to the winter seasonality likely a decline in EZA. I think also year-end sales this year will be low, there's no real indication of anything significant. If you look at the Q4 consensus, as it stands today, it is potentially on the high end but I think it's a good target to work toward.

Angie Sedita -- UBS -- Analyst

Okay. Okay. Okay.

I appreciate that. That was very helpful.

And then great to hear the positive sentiment around the international outlook. Clearly, your tone has changed and what you're seeing has changed, but maybe just to hit quickly on Ecuador and Shushufindi with the restructuring of the tariffs, the thoughts on what the impact would be going into 2018.

Paal Kibsgaard -- Chairman and Chief Executive Officer

Patrick. You want to handle that?

Patrick Schorn -- Chief Financial Officer

Clearly, we are very pleased that we are in a more positive situation around the whole payment issue in Ecuador. It has been largely resolved. Activity wise, we expect to be fully focused again on maximizing production. It is correct that we have had a change in the tariff but it continues to be one of the heartlands of SPM that we have, and where we have a business that we're very pleased. We continue to have all our technical resources focused on improving the production levels as much as we can, and where we're quite pleased with the opportunity that we have close to renegotiations in Ecuador.

Angie Sedita -- UBS -- Analyst

Okay. Great. Thanks, guys, I'll turn it over.

Patrick Schorn -- Chief Financial Officer

Thank you, Angie.

Operator

Your next question comes from the line of Ole Solerer from Morgan Stanley. Please go ahead.

Ole Sloerer -- Morgan Stanley -- Analyst

Yeah. Thanks a lot.

I have two questions for you Paal. One is around bore drilling and the change in contracting model there and the second one is a similar question on the Cameron.

But starting with boring, in the context of your comments that you are now seeing an increasing number of customers that are seeking some kind of performance-based contracting model that sort of breaks a little bit with the history of procurement. Couple that with your view that it's the sort of 50% increase in bid value. Could you just talk a little bit first maybe about how the reception has been from the drilling side of proposing performance-based contracts? Is there something which is something that one or two of your customers are now interested in? Or is it broader?

Paal Kibsgaard -- Chairman and Chief Executive Officer

Obviously, performance-based drilling contracts has been established on land for quite a long time. We see that the next, I would say, area that this will start growing is in shallow water. If you want to drill performance-based, you need to have a pretty good handle on the sub-surface and the drilling risks. Given the drilling activity that we've had, historically, on shallow water, this is again, why we see this as the next horizon that is the contracts we'll take on.

In terms of customers, we have a range of customers who are already pursuing performance drilling contracts offshore on shallow water. The main thing is that these contracts traditionally has not included the rig. What we are seeing now is several customers are trying to bring the rig into play. Our rationale for investing in bore is generally to get closer to one of the rig providers to try to drive this new behavior and establish performance contracts including the rig. Now, our relationship with bore does not preclude us from having similar relationships with all the other jack-up providers. We have engagement and discussions with several of them to do exactly the same there. So, I would say it's a growing interest from the customer base. We have several key customers who are already well-advanced in trying to establish this. The main thing is that we need the directional drilling company, and all the other well construction related services on the rig, together with the rig provider, to come together and establish a contracting framework that is benefiting all parties involved. I think that's what we are trying to drive through our initial investment in bore.

Ole Sloerer -- Morgan Stanley -- Analyst

It does break with the traditional way of contracting very much so. I was just looking to what extent customers are really opening up to that type of debate.

Paal Kibsgaard -- Chairman and Chief Executive Officer

I think it's fair to say that several key customers are, I think, are happy to never see rig day rates again if they can get the entire drilling package including downhole and surface onto performance-based, I think that would be a benefit both for the customer and for the service companies involved.

Ole Sloerer -- Morgan Stanley -- Analyst

Second question on Cameron, I think it's clear to everybody now that when you bought Cameron back a few years ago, a lot of eyebrows got raised. Looking at the results now it's clearly something that a few billion that, I think, Cameron could have achieved on their own. You highlighted Cam Shale as one success. Can you talk a little bit about other areas? Give us some examples of areas where Cameron is now achieving a performance they wouldn't have been able to do on their own. I've presumed international markets that you've opened up for valves and that type of thing all on the sub-sea side, where you continue to crank our pretty hefty margins. Are you hearing about pricing pressure, but sometimes a little bit difficult to understand the difference between a pricing pressure and a lower cost solution? Could you give us a few more data points around what you've done with Cameron and how far you've come relative to what you had hoped for?

Paal Kibsgaard -- Chairman and Chief Executive Officer

Ole, first of all, Cameron was always a well-run company. I think what we have done is we have brought it into our overall global organization and managed to take a well-run company and together with what we can offer on this make a one plus one equals three. That's the whole idea behind it. If you look at the various product lines of Cameron, obviously one sub-sea we have been involved with for a number of years already, and the momentum of that part of the business was already quite strong when we took full ownership of Cameron, I think you've seen in tender win rates, and the margin performance that the whole thesis behind what we try to achieve with going sub-sea is really working.

On the drilling side, it's obviously a significant lull in the market where Cameron drilling which was, to a fair extent, focused on the offshore market, has seen a significant reduction in activity, but they've done, I would say, an outstanding job in redirecting the portfolio and the capabilities toward supporting our rig of the future efforts. They are now in the process of finalizing all the surface rig equipment packages as well as being more focused on the BOP side for land rigs as well. I think we are really working very well together with the Cameron drilling site and the rig of the future project to drive performance there.

On the surface side, obviously, the closer tie to our frack business where we have ramped-up significantly in U.S. land over the past couple of quarters, is a very good synergy and benefits. I would say on surface international, there are some core, very good markets for surface in the international market. But at the same time, there are a number of countries and huge markets for the rest of Schlumberger where there is very limited presence of surface and we are, obviously, attacking these as we speak.

Finally, on valves and measurement as well. Very good, I would say synergies and performance up toward what we're doing with the early production facilities and Cameron Processing overall. I think all of the product lines are performing very well. I'm very pleased with the management capabilities of Cameron and also how they are very seamlessly integrating with the rest of the organization.

Ole Sloerer -- Morgan Stanley -- Analyst

Congrats on that Paal. I hand it back.

Paal Kibsgaard -- Chairman and Chief Executive Officer

Thank you, Ole.

Operator

Your next question comes from the line of Scott Gruber from Citi. Please go ahead.

Scott Gruber -- Citi -- Analyst

Yes. Good morning.

Paal Kibsgaard -- Chairman and Chief Executive Officer

Good morning.

Scott Gruber -- Citi -- Analyst

Paal, I wanted to ask another question on SGM. With the growing book of business in North America, how critical are these projects not only to diversify the portfolio but also showcase the various technologies and techniques that you can bring to the table to enhance production? During the prepared remarks, Patrick mentioned the impressive results in the Powder River. Are you at the point now where you can start to market the results to other customers outside the SGM initiative?

Paal Kibsgaard -- Chairman and Chief Executive Officer

To answer the last part of the question first. Yes. Within what is agreed with our customers, we can use this to market it and that's partly the background for Patrick's comments today. We are quite pleased with the performance of the project and the collaboration we have with SM Energy. I would say that looking at the North America Market, SPM has an opportunity set in North America, for sure. I think both SM Energy and the Torgersen deal are clear examples of that. The benefits we have in the North America land markets that we might not see in other land-based fairly commoditized market is that scale really matters. While we obviously will look at SPM opportunities in North America, getting scaled behind our activities whether this is on fracking or drilling is also something that will help us perform better in these markets. But we are pursuing SPM in the North America land market as we indicated in our conference call in July.

Scott Gruber -- Citi -- Analyst

But do you think the production enhancement benefits that you're delivering in the Powder River and hopefully in Canada, do you think that can drive the broader sales effort in North America around your technologies and capabilities?

Paal Kibsgaard -- Chairman and Chief Executive Officer

Absolutely. I think what we are doing in these projects, we can provide to other companies whether that is all the way from stand-alone products and services, consulting services, it could be also integrated drilling services all the way up to SBM, right? The main thing is the methodology and the principles of how we go about developing these reservoirs. We are happy to engage with our entire customer base in the range of business model that we offer.

Scott Gruber -- Citi -- Analyst

How quickly do you think that benefit can materialize? I ask because I often hear investors comment that the EMPs, particularly the larger EMPs go around to the energy conferences and actually discuss how they're less reliant upon big service companies to execute in the shale place. But if you can go out on these SPM projects and really showcase production enhancement, it would be a strong counter to this narrative.

Paal Kibsgaard -- Chairman and Chief Executive Officer

That's fair. But we are here to serve our customers. If customers believe that they can do a better job without us, then we will obviously try to engage with them and show them what we can do. But if their conclusion is that they can do it in a different way, then we don't want to have an argument about that. I think there are plenty of customers who are open to listen to what we do, some of them might be doing similar things already, in which case they may not need us but I think there is still a significant part of the customers base in North America land where we can have an impact and that's what we're pursuing.

Scott Gruber -- Citi -- Analyst

Got it.

Just a quick question on U.S. frack. The impressive growth during the quarter was that primarily just riding the growth plans of customers? Or do you feel like you were often displacing less efficient frack companies that may be experiencing some execution issues given that the growth in the frack count?

Paal Kibsgaard -- Chairman and Chief Executive Officer

Generally, this quarter we have continued to deploy along the frack calendar that we already had established, right? As you continue to push pricing and as some companies perform better or worse, there is always a flux around what service company works for what customer. Generally, we have been executing and implementing the targeted deployment plans that we already had established. There hasn't been a huge move around replacing others as of this stage.

Scott Gruber -- Citi -- Analyst

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

Paal Kibsgaard -- Chairman and Chief Executive Officer

Thank you, Scott.

Operator

Your next question comes from the line Waqar Syed from Goldman Sachs. Please go ahead.

Waqar Syed -- Goldman Sachs -- Analyst

Thank you for taking my question.

My question relates to the Weatherford deal. Could you apprise us what the timing is on that deal? I understand there's a true-up component as well. Could you comment in which direction the valuation could move on that deal?

Paal Kibsgaard -- Chairman and Chief Executive Officer

I won't be able to go into the details of that. Right? Other than that, the first priority we have been working on is to obtain the U.S. antitrust approval. We work closely with the D.O.J. to get all the information to them that they require to make their decision. We are optimistic that we will get the U.S. antitrust approval during the fourth quarter. As you mentioned, there are some ancillary agreements that we still need to work through with Weatherford. These agreements were all identified and laid out as we initially signed the deal. We hope to be in a position to finalize these discussions and get all the agreements done by the end of the year. Going into any details of what those agreements cover and what we're discussing, obviously, I won't be able to do that.

Waqar Syed -- Goldman Sachs -- Analyst

Then just a quick question on SPM investments in 18 based on the projects that you've already announced, what level of SPM investments do you expect in 18?

Paal Kibsgaard -- Chairman and Chief Executive Officer

Patrick?

Patrick Schorn -- Executive Vice President New Ventures

We obviously, there's a number of deals we have announced depending on which particular project you look at whether there is production or not. Obviously, the investment profile and whether or not it is generating cash from day one is quite different. Overall, it is a business that we see growing and therefore we intend to continue to invest in it. You should see an increase in SPM spending and it's all going to be a question of how many deals we do. The thing that it is important to keep in mind, we've obviously seen quite a few SPM deals come through in the last few quarters, it is unrealistic to believe that we are going to keep at this very high rate of deals continuously going forward, it is not necessary. What you'll see, as well, is that as time progresses more and more of the projects are actually going to be generating their own cash flow. That is really the way that we see it going forward. It is a growing business and we'll continue to invest. It really depends, a little bit, on what is the total make-up of projects that we have finally an IT member still working on doing a few more before this year is over.

Waqar Syed -- Goldman Sachs -- Analyst

Normally the run-rate is $150 million investment in a quarterly basis, I guess that's the base level. For next year, based on announcements should be more like a $250 million per quarter level? Would that be reasonable?

Patrick Schorn -- Executive Vice President New Ventures

I think it is reasonable to expect that it is going to be somewhat higher. I don't want to give you a number right now.

Waqar Syed -- Goldman Sachs -- Analyst

Okay. Thank you very much.

Operator

Your next question comes from the line of Bill Herbert from Simmons and Company. Please go ahead.

Bill Herbert -- Simmons & Company-Analyst

Thanks. Good morning. Another question on SPM. Could you talk about, Patrick, the mix of business going forward? The mix of investment, the mix of projects that you expect to invest in going forward on SPM?

Patrick Schorn -- Executive Vice President New Ventures

There is a wide variety of things that we look at when we are taking SPM projects on. It is clear that we have had, traditionally, a fairly strong concentration in Latin America, which we wanted to make sure that we get a more global coverage, more in line with the overall footprint that we have and where we see the opportunities. I think it is very clear that the way we invest in SPM is also related to where we have a strong footprint and where we have some excess capacity. One of the key things that we do in most of the projects that we take on is that we are investing in kind, meaning we are using our services to invest and earn a certain equity in the project. The bigger footprint that we have in a certain place, the better we can use that at a very efficient rate invest through our own services. Going forward, you should see us do more of a coverage of SPM projects around the world that is in line with our overall footprint. Where we have larger Schlumberger operations, it is likely to have SPM opportunities as well.

Going back to how we always have described SPM opportunities, it is the field that we are looking at, where we are having an opportunity to do something different than what the current customer or owner of that field is doing. There's gotta be a technical angle in which we see that we can improve what is currently being done. We see opportunities today in just about every area. We see them in the Far East, we seem them in the Middle East, we see them in North America. There's plenty of opportunities at this moment and I would say think about more of a geographical match with the Schlumberger footprint. See us go a bit more into gas and I think that that is probably the best way of describing it.

Bill Herbert -- Simmons & Company-Analyst

Okay. With respect to, staying on the SPM theme, in an improving macro outlook, and firming oil prices, that should lead to less of a need on the part of resource holders and less of a need on the part of Schlumberger given the fact that your asset employment for your global franchise should be improving. Is that correct? Or no?

Patrick Schorn -- Executive Vice President New Ventures

That's correct.

Bill Herbert -- Simmons & Company-Analyst

Okay.

Finally, you mentioned it in your upfront commentary, Patrick, that there was a lot of noise around Shushufindi and a lot of misinformation. Can you give us the magnitude of adjustment on the fee per barrel with regard to this project?

Patrick Schorn -- Executive Vice President New Ventures

I've described that we continue to be very happy with what we have. I think that maybe the most important thing to take out of the commentary and how we described the impact is that the tariff that we are having with Shushufindi still fully makes the returns and margins that we expect from an SPM project. That is probably as close as I want to get in giving you a bit of color around the reduction we have seen there. It is a project that we're very pleased with and it fits very well within our portfolio

Bill Herbert -- Simmons & Company-Analyst

Okay. Thank you.

Operator

Your next question comes from the line of Jim Wickland from Credit Suisse. Please go ahead.

Jim Wickland -- Credit Suisse -- Analyst

Good morning guys. Thanks for fitting me in.

Paal, you were talking on Ole's question about performance-based drilling and you do it now, but you haven't done it with the rig. Can you update us on Eurasia? Because if I remember correctly one of the points of owning Eurasia was the prime contractor in a lot of Russian situations as the rig owner, rather than in the U.S. it's driven by completion, is that the case? Is this a continuation of the trend? Can you catch us up where you are on Eurasia?

Paal Kibsgaard -- Chairman & Chief Executive Officer

The rationale behind the EDC transaction is exactly as we said, or described it for bore. This obviously happens to be on land in western Siberia as opposed to shallow water. But it's exactly the same thing. It's about driving drilling performance through our downhole drilling technology through the rig technology but also through the entire one-drill system including DELFI as I described earlier in the prepared remarks. The rationale is exactly the same.

In terms of where we stand, we are currently working through the requirements from the various Russian regulatory authorities providing them with information that they need to assess the application that we have to get antitrust approval. I think the process there is moving along. We remain optimistic that we will get the ultimate approval. Our job at this stage is to provide the authorities with the information that they need so that they can make their determination and their final decision. We remain optimistic that we will get this closed.

Jim Wickland -- Credit Suisse -- Analyst

My follow-up, if I could, we've been asked this by a couple of investors, is the latest Canadian SPM investment in terms of what you've done and what you're talking about doing, does that diminish the likelihood or magnitude of buybacks or dividend increases going forward?

Paal Kibsgaard -- Chairman & Chief Executive Officer

I would say on the way, we have always planned to use our cash. The priority has always been to reinvest into the business, into projects and activities that are driving earnings and that are agreeative our returns. Beyond that, we have said that we will review dividends on an annual basis and the balancing factor will always be buybacks. Nothing has changed to this effect. We will review dividends in January and we will continue to be in the market to buy back stock but we won't buy back stock at the expense of not being able to do what we think is right, in terms of driving the growth of the underlying business.

Jim Wickland -- Credit Suisse -- Analyst

Perfect. Thanks, guys.

Simon Ayat -- Executive Vice President and Chief Executive Officer

Let me add one thing about the Canadian project.

Jim Wickland -- Credit Suisse -- Analyst

Yes.

Simon Ayat -- Executive Vice President and Chief Executive Officer

The maximum cash exposure that we have announced which is the amount we're going to pay upfront. It is maximum cash exposure. Any future investment in the project will be mitigated by the cash flow that we will generate from the production of the project itself. Just to make it clear, the future investment in Torgersen will be basically self-sufficient from the production that we're going to generate from the project itself.

Jim Wickland -- Credit Suisse -- Analyst

Okay. Thanks, guys. This is helpful.

Paal Kibsgaard -- Chairman & Chief Executive Officer

Thank you, Jim.

Operator

Your next question comes from the line of Kurt Helyad from RBC. Please go ahead.

Kurt Helyad -- RBC Financial -- Analyst

Hey. Good morning.

The question I have for you guys, you referenced the 50% increase in FIDs and tenders, I think that's both in terms of number and you mentioned contract value. I was wondering if you could give us some general size of that potential contract value and how you might assess your win-rate on that contract value?

Paal Kibsgaard -- Chairman & Chief Executive Officer

I don't want to go into what the exact volume is in terms of contract value, but if you look at our win-rates obviously all these contracts are highly competitive but I would say that I am, at this stage satisfied with our win-rate. Our win-rate in 2017 is somewhat up from what it was in 2016 it continues to be competitive, but we are looking to balance out the pricing that we put into these contracts which we will need to live with for a number of years. At the same time having the contract base and the growth platform we require to be in an optimal position as the international upturn starts. Overall, we are spending a lot of time making sure we treat every tendering opportunity with a maximum amount of attention. I think so far, we've been quite successful in doing so.

Kurt Helyad -- RBC Financial -- Analyst

Okay.

In your commentary around the tenders and the FIDs, you referenced both land and offshore. On the offshore front, you had some commentary about shallow water. I wonder if you can give us some perspective on shallow water, deep water. What are you seeing between shallow and deep on the tenders and FIDs going into next year?

Paal Kibsgaard -- Chairman & Chief Executive Officer

I think it's pretty evident that shallow water is gonna come back a lot quicker compared to, I would say, and overall ramp in deepwater activity. This is, again, partly why we have our focus on shallow water both from a Schlumberger Drilling Services standpoint, but also teaming up with the jack-up providers like bore to make sure that we are in the forefront of securing the work on these rigs as they start to ramp-up.

Kurt Helyad -- RBC Financial -- Analyst

And if I may squeeze one last one in here. You referenced, Paal, a hardware ownership being critical to your strategy going forward. Hardware is a very generic term. I was wondering if you could elaborate a little bit more on hardware. Is it rigs? Land rigs? Offshore rigs? Is it just equipment? I was just wondering if you could elaborate a little bit more on that hardware element.

Paal Kibsgaard -- Chairman & Chief Executive Officer

I agree, hardware is a pretty generic term, but I would say that the current ownership that we have of hardware, I'm pretty happy with. We are not going in to take full ownership of jack-up rigs or floaters. We are taking ownership of our own internally developed land rigs, but beyond that, we want to have relationships with jack-up providers and potentially floater providers. Our focus now is on the jack-ups and we have no intentions whatsoever of going back into full ownership of offshore rigs.

Kurt Helyad -- RBC Financial -- Analyst

Okay. Great. Excellent. Thank you so much. Appreciate it.

Paal Kibsgaard -- Chairman & Chief Executive Officer

Thank you.

Operator

Your final question today comes from the line of Chase Mulvihill from Wolf Research. Please go ahead.

Chase Mulvihill -- Wolf Research -- Analyst

Thanks for squeezing me in.

I guess first question. Could you talk about the production margins in 3Q and the negative impact that you saw from the reactivations? It sounds like some of that comes out in 4Q. Maybe if you could help us frame that a little bit?

Paal Kibsgaard -- Chairman & Chief Executive Officer

The production, if you look at what is reported, the main impact on the incremental margins sequentially for the production group, is what we refer to in North America land where we've had a pretty significant ramp-up both in the second and third quarter and this creates inefficiencies internally in terms of how we deploy, how we hire, and also how we optimize our distribution network for all the products that we need to get into these operations as well. Some bottlenecks were experienced in the third quarter and we are basically working through these now and they should generally abate in the fourth quarter, and for sure into the first quarter. We are working through these things, and I'm not overly worried about it, but there are some things to be sorted out which we are actively working on as we speak.

Chase Mulvihill -- Wolf Research -- Analyst

Okay. Thank you, Paal.

One quick follow-up. I'm just following up on Bill and Scott's question around SPM. When we think about SPM in U.S. owned shore, are you trying to take advantage of excess service capacity or is more about better penetration of technology? If it's the latter, what technology do you think you're able to exploit through SPM that you're not through your traditional businesses?

Paal Kibsgaard -- Chairman & Chief Executive Officer

I would say U.S. land is generally looking to demonstrate what our technology and capabilities can generate. Right? This is all the way from well placement, drilling efficiency, frack placement and overall how we complete these wells. Most of these things we have generally talked to all our customers about already. The main thing is the ability to put this together and to consistently delivering top petrol wells which I think we've demonstrated through the example that Patrick described today with SM Energy. We're just looking to do more of that. That could be in the form of SPM, but like I said earlier, it could be in any form of whatever contractual engagement our customers are looking for.

Chase Mulvihill -- Wolf Research -- Analyst

Great. Thank you. I'll turn it back over. Thanks, Paal.

Paal Kibsgaard -- Chairman & Chief Executive Officer

Alright.

Thank you very much. As usual, I would like to close with a summary of the major points that we have discussed this morning. First, we have, over the past three years, created industries broadest upstream technology portfolio. Through the Cameron transaction, a series of acquisitions, joint ventures, and partnerships with smaller technology companies, and our own research and development efforts, we have created an unparalleled technology platform which is now ready for broad-based system integration. Second, our long-held views on the oil markets are now being reinforced by data points that make us increasingly positive on the outlook and recovery for our global business. And last, as the global EMP investment starts to recover, Schlumberger is uniquely positioned to outperform based on the strength of our technology portfolio the capabilities of our global organization, and the quality and efficiency of the services we provide to our customers. That concludes our call for today. Thank you.

Operator

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

Duration: 65 minutes

Call participants:

Paal Kibsgaard -- Chairman and Chief Executive Officer 

Simon Ayat -- Chief Financial Officer & Executive Vice President

Patrick Shorn -- Executive Vice President New Ventures

Simon Farrant -- Vice President Investor Relations

James West -- Evercore ISI -- Analyst

Angie Sedita -- UBS -- Analyst

Ole Sloerer -- Morgan Stanley -- Analyst

Scott Gruber -- Citi -- Analyst

Waqar Syed -- Goldman Sachs -- Analyst

Bill Herbert -- Simmons & Company-Analyst

Jim Wickland -- Credit Suisse -- Analyst

Kurt Helyad -- RBC Financial -- Analyst

Chase Mulvihill -- Wolf Research -- Analyst

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