Schlumberger NV (SLB) Q2 2019 Earnings Call Transcript

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Schlumberger NV (NYSE: SLB)
Q2 2019 Earnings Call
Jul 19, 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 and welcome to the Schlumberger Earnings Conference Call. [Operator Instructions]

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

Simon Farrant -- Vice President, Investor Relations

Good morning -- good afternoon and welcome to the Schlumberger Limited Second Quarter 2019 Earnings Call. Today's call is being hosted from Paris, France, following the Schlumberger Limited board meeting. Joining us on the call are Paal Kibsgaard, Chairman and Chief Executive Officer; Simon Ayat, Chief Financial Officer; and Olivier Le Peuch, Chief Operating Officer.

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 present comments on our second quarter financial performance before Olivier reviews our results by geography. Paal will close our remarks with a discussion of our technology portfolio and our updated view of the industry macro. However, before we begin, 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 measure can be found in our second quarter press release, which is on our website.

[Operator Instructions]. Now, I'll hand the call over to Simon Ayat.

Simon Ayat -- Executive Vice President and Chief Financial Officer

Thank you, Simon. Ladies and gentlemen, thank you for participating in this conference call. Second quarter earnings per share was $0.35, excluding charges and credits, this represents an increase of $0.05 sequentially and a decrease of $0.08 when compared to the same quarter last year. There were no charges or credits recorded during the quarter. Our second quarter revenue of $8.3 billion increased 5% sequentially, largely driven by our international operations. Pretax segment operating margins increased by 17 basis points to 11.7%.

Highlights by product group were as follows: Second-quarter Reservoir Characterization revenue of $1.6 billion increased 7% sequentially due to activity increases beyond the normal seasonal improvements we typically experience in the Q2. These increases were primarily driven by strong multiclient license sales and higher international wireline activity. Margins increased 81 basis points to 19.8% due to the increased contributions from higher margin wireline activity and multiclient. Drilling revenue of $2.4 billion increased 1% as a stronger activity in the international areas, was partially offset by lower drilling activity in North America land. Margins decreased 45 basis points to 12.4%.

Production revenue of $3.1 billion increased 6.5% sequentially, primarily driven by higher international activity across all the product lines. Margins were essentially flat at 8% as the improvements in international margins from higher activity was offset by the effects of pricing pressure in North America land. Cameron revenue of $1.2 billion increased 5% sequentially, margins increased 94 basis points to 12.6%. These increases were primarily driven by one OneSubsea and Surface Systems. The book-to-bill ratio for the Cameron long-cycle businesses was 1.2 in the second quarter. The OneSubsea backlog increased to $2.2 billion at the end of the second quarter.

Now turning to Schlumberger as a whole, the effective tax rate was 16.7% in the second quarter compared to 15.5% in the previous quarter. This increase was a result of the geographic mix of earnings. In terms of cash flow, we generated $1.1 billion from operations, leading to $459 million of a free cash flow. Good performance for the second quarter, despite the temporary delays in receivable collection that we experienced in certain regions. Our net debt increased $335 million during the quarter to $14.7 billion. We ended the quarter with total cash and investment of $2.3 billion. During the quarter, we spent $101 million to repurchase 2.5 million shares at an average price of $40.12. Other significant liquidity events during the quarter included capex of approximately $404 million and capitalized costs relating to SPM projects of $181 million. During the quarter we also made $693 million of dividend payments. Full year 2019 capex, excluding SPM and multiclient investment is still expected to be approximately $1.5 billion to $1.7 billion.

I now, I will turn the conference call over to Olivier.

Olivier Le Peuch -- Chief Operating Officer

Thank you, Simon, and good morning everyone. Our second quarter revenue increased 5% sequentially, driven by international activity. Our international business grew 8%, outperforming international retail growth of 6%, while North America revenue grew 2% sequentially. I'm pleased with the progress made and proud of our team's performance, many of whom are met during the quarter, maybe it's to our global operations.

My comments today will include the Cameron business. I will start with our North America operations. In North America, consolidated revenue was 2% higher sequentially, with land revenue growing marginally, while offshore grew 10%. Production revenue increased 3% due to higher cementing revenue and improved OneStim hydraulic fracturing fleet utilization, in response to market demand. These positive factors however were offset by the spring break-up in Canada and lower demand for drilling services, as a result of this 5% decline in US land rig count.

North America land remains a challenging environment. We need to get the operator focus on cash flow has capped activity and continued efficiency improvements, have also reduced the number of active rigs and frac fleets, so far we've got major impact on oil production. In response, we continue our returns focused approach deploying new technology and working closely with the major independents and IOCs that's our industrializing to development of unconventional share resource at increasing scale.

Our competitive advantage in North America land operation continues to build in our differentiation [Phonetic] in technology and efficiencies. Surface efficiency is one area where we have made significant progress. One new technology is the MonoFlex, our new fracturing fleet delivery system, which significantly speeds up multiwell pad rig up, and reduces nonproductive time and safety reasons, with overall efficiencies another key issue for our customers.

We are seeing increasing take-up of technologies that help customer design and deploy completion, that mitigate or avoid parent-child well interference. Two such technologies are BroadBand Shield and Fulcrum cement. BroadBand Shield, innovative fracture control technology, amid the risk of communicating with, or factoring into nearby wells. By the end of June, BroadBand Shield services has been used on nearly double the number of stage when compared to all of 2019. Fulcrum cement improved stimulation efficiency by helping keep fracturing fluid in the target reservoir zone by improving the cement bond.

In the second quarter, Fulcrum technology deployments tripled versus the previous quarter and doubled the first half when compared to full year 2018. In our North America land businesses, surface system grew 5% sequentially and 6% year-over-year. This was driven by the factory rental business benefiting from MonoFlex technology and integration with OneStim. Artificial lift was strong with sequential ESP sales growth of 5% for new technology and fit-for-purpose pump systems, that outpaced low-flow service revenue. Offshore North America, revenue increased 10% sequentially, primarily due to strong WesternGeco multiclient licenses. While offshore rig count has yet to increase significantly, customer interest is high, indicating stronger activity coming in the second half of the year.

With the North America market remaining challenge in the coming months, we continue to protect our operating margin by focusing on our agile execution and operational efficiency. In the international markets we continue to witness broad-based activity growth. More than half of the international GeoMarket posted high-single digit revenue growth or better year-over-year. This was mainly driven by rig activity, but our performance was also enhanced by key GeoMarket activity exceeding normal seasonal rebounds. The improving exploration trends of last quarter also continued. Wireline offshore exploration revenue grew by a third, during the first half of the year with a sizable increase with new technology sales.

As offshore momentum rigs, shallow water rig activity grew by 14% in the first half and new productivity is strengthening as new project assumption. Cameron International revenue grew significantly over quarter-over-quarter supported by leverage of the GeoMarket structure. This is the fifth consecutive quarter where the total Cameron book-to-bill ratio was greater than 1%. This was also the first quarter since we acquired Cameron, where all four product lines both long and short cycle grew revenue sequentially. Consolidated revenue in the Latin America area increased 12% sequentially from 21% revenue growth in the Mexico and Central America GeoMarket. WesternGeco multiclient seismic sales had a strong quarter as exploration investments continue to gain strength offshore.

In the Latin America, North GeoMarket, revenue was driven by SPM activity in the quarter with the Shaya project continuing to improve on strong execution on waterflooding recovery. Europe, CIS Africa area consolidated revenue increased 11% over the previous quarter on the back of seasonal activity recovery in the Northern Hemisphere, and the rig activity increase in Eastern Europe. In the UK & Continental Europe GeoMarket revenue exceeded expectations by growing at 28% sequentially with all product lines expanding growth.

In Russia, and Central Asia GeoMarket, we experienced 12% revenue growth on seasonal recovery with the majority of product lines growing revenue high single digits or better. Consolidated revenue in the Middle East & Asia area increased 5% sequentially, with Far East Asia and Australia GeoMarket leading the way with 19% sequential revenue growth, mostly driven by offshore activity. Elsewhere in the area, the seasonal activity recovery in China was partially offset by lower activity in Malaysia and India.

Iraq was lower on completion of IDS project and in Saudi Arabia revenue increase on sales -- of increase on completions. In the Middle East, the four Cameron product lines delivered double-digit revenue growth, driven by increased activity and share gains across the portfolio. As discussed in our last earnings call, we have initiated a systematic process to address underperforming business units and contracts in the international markets. I'm pleased to say that more than two-third of our product line expands sequential revenue growth in the international markets this quarter and with each of them having expanded their margins.

A few business units however, continue to be highly dilutive to our international margins, and we're looking at their performance very closely. We continue to work with our customers result underperforming contracts, exploring ways to eliminate waste, to join planning our execution, while improving terms and condition to avoid unnecessary cost of excessive risk. Most customers are very receptive to this, as this is a benefit of increased operational performance and are increasingly concerned about securing supply of technology and resource for future activity. This focused effort already provide promising feasible improvements in our international margins.

As international activity increases, our deployment of capex is also prioritized toward the business units with higher returns. This dynamic capital deployment is creating some tightness in the market, which is another catalyst for pricing improvements.

To conclude, we continue to see high single-digit revenue growth internationally, excluding Cameron, consistent with previous guidance. At the close of the first half of 2019, international revenue has increased 8% year-over-year, while North America land revenue has declined 12% year-over-year. This results are inline for our view of the normalization in global E&P spending.

And with that, I will turn the call over to Paal.

Paal Kibsgaard -- Chairman and Chief Executive Officer

Thank you, Olivier, and good morning everyone. I will start by adding a few comments to complement the geographical review of the quarter provided by Olivier and highlight how the current market developments are favorably impacting the opportunity set for Schlumberger. Let me begin with the macro environment, where the market sentiments remain balanced. On the demand side, the 2019 agency forecasts have been reduced slightly on global trade fairs and current geopolitical tensions, but we do not anticipate any change to the structural demand outlook for the mid-term.

On the supply side, we continue to see US shale oil as the only near to medium-term source of global production growth. However, the consolidation among North American E&P companies is further strengthening the shift away from growth focus toward financial discipline, while at the same time driving increased focus on HSC, technology adaptation, more collaborative business models, and it will also potentially dampen the large variations in the investment levels throughout the cycle. These effects combined with the recent decision by OPEC and Russia to extend production cuts through the first quarter of 2020, are likely to keep oil prices range bound around present levels.

Although the markets are well supplied from projects, sanctioned and partly funded prior to 2015. This source of supply additions will start to fade in 2020, thereby further exposing the accelerating decline rates from the mature production basins around the world. In addition, while the number of new FID approvals in 2019 are likely to increase again for the fourth consecutive year, their size and number account for supply additions far below the required production replacement rates. We therefore maintain our view that international E&P investments will grow by 7% to 8% in 2019, a figure confirmed by the increasing international rig count and the growth seen in our international business in the first half of this year.

In contrast, the cash flow focused among the E&P operators confirms our expectations of a 10% decline in North America land investments in 2019. This means the welcome return of a familiar opportunity set for Schlumberger. For the first time since 2012 and 2013 we see high single-digit growth in the international markets, signaling the start of an overdue and much needed multi-year international growth cycle. This growth is taking place in our backyard, where our technology performance and long-standing presence is highly valued and where our market share and profitability gives us an earnings potential upto four times that of our closest competitor.

Our leading international market position is built on our scale, footprint and extensive technology portfolio and further strengthened by the significant efforts we have made to evolve the Company over the past five years, along the following three directions. The first is our internal transformation program that has modernized our workflows in our organizational structure, by creating stronger and more professional support functions with cutting-edge planning, execution and collaboration tools. This has allowed us to significantly improve the utilization of our asset base and reduce our operating costs through improved planning, distribution and maintenance.

At the same time, we have been able to deploy our people and expertise more effectively. All of this has created structurally lower capital intensity of our traditional product lines and lower working capital throughout our technology offering. This will together improve our ability to generate incremental margins and free cash flow as international activity continues to increase and pricing headwinds gradually become tailwinds. The second major direction we have been pursuing is our digital strategy, which is built on the pillars of a cloud-based applications platform and open data ecosystem and a broad range of edge architecture solutions. Altogether, this represents a complete platform ready to support our customers in accelerating the digital transformation of our industry. After years of R&D investments in line with this strategy, we are now introducing several applications to the market with more to follow in the coming years.

Within reservoir characterization, we recently introduced the GAIA platform at the EAGE Conference in London. GAIA uses the power of DELFI to enable exploration-ist to discover, visualize and interact with all the available data in the basin without compromising resolution or scale.

In drilling our OneDrill platform is the first digital drilling system that is fully designed for integration and automation. It spans our drilling software applications, the automation ready rig of the future and the range of new downhole hardware that together will redefine the efficiency of land drilling operations. And spanning production in Cameron, our recently announced Sensia joint venture with Rockwell will upon closure be the first fully integrated oilfield automation provider focused on production measurement solutions, domain expertise and automation. The third of our focus areas in recent years has been to reduce the capital intensity of our business, after we invested actively to build out the company in the early part of this extended downturn.

Our efforts to reduce capital intensity began with our decision to exit the marine seismic business in late 2017, after our advanced geophysical measurement technology failed to deliver the needed financial returns over a number of business cycles and with no improvements insights. Another recent example is the divestiture of our land drilling rig business in Kuwait, Oman, Iraq and Pakistan to the Arabian Drilling Company, a minority joint venture we have had with our Saudi Arabian partner Taka for more than 50 years. Through this transaction we will eliminate the need for capital investments into this rig fleet while maintaining access to the rigs for our integrated drilling operations in the Middle East. We will also follow a similar capital structure, but with other partners for the deployment of the rig of the future where we now have introduced the first rigs into US land.

We have also announced our plans to exit the business related to Fishing & Remedial services, DRILCO and Thomas Tools, that came with the Smith acquisition in 2010. As these business lines are capital intensive generate a lower return on capital and are not core to our drilling operations. Beyond our recently announced transactions, which will produce approximately $1 billion of gross proceeds in 2019, we have also stated our intentions to monetize partly or fully, our two SPM projects in Argentina and Canada, to demonstrate our ability to generate value from the assets we take under management. And while we have decided not to undertake the new SPM projects, that involves any period of negative cash flow, we still see a significant opportunity to deploy the technical and commercial expertise we have developed within SPM to less capital intensive contractual models.

On this basis, we have signed an MOU to work on a large integrated project in the OML 11 block offshore in Nigeria, where we will act as the technical and project execution partner with funding provided by a third party. This SPM light project, which involves no Schlumberger capital investment is our preferred SPM business model going forward. We have also recently entered into a similar SPM light project to manage the field in Bahrain. In addition to the divestitures and the new SPM light model, we have also structurally lower the capital intensity of our core business over the past five years, where we today run our operations with a capex requirement of around 5% of revenue compared to historic levels of 10% to 15%.

In addition to the major directions, I've just described our day-to-day execution focus continues to be on further improving the quality of service we provide to our customers, optimizing the deployment of our resources, as we start to see shortages in several basins and to address our underperforming contracts and business units around the world. Altogether, this should enable us to restore profitability to our target levels, and also to drive the incremental margins and free cash flow going forward.

Let me conclude my remarks with a few comments, as we transition to a new Chairman and new CEO of Schlumberger. Earlier today, we announced the appointment of Mark Papa, as our new Chairman and Olivier Le Peuch as our new CEO. I have spent the past decade as COO, CEO and more recently as Chairman of Schlumberger, and while it has not necessarily been the friendliest of decades in terms of the business environment, it has been a fantastic journey and a great honor to be trusted with the responsibility to lead this amazing company which is made up of the best people in our industry.

One of the most important duties of assisting Chairman and CEO is to ensure an orderly succession process to the next leader, which in my mind involves several key responsibilities. The first of these is to pick the right time to step down. After a decade at the top of the company with the deepest and most challenging downturn in our history behind us and with the international upturn starting to take shape. Therefore, asked our board to start to succession process exactly 12 months ago. The second responsibility is to fully support the Board as they run the search and selection process for the leadership succession. In this respect, I provided input to the Board on a broad range of topics including candidate assessments.

The third is to support and guide the incoming CEO as he or she gradually takes over as the new leader of the Company, and it has been a pleasure managing side-by-side with Olivier, over the past six months. And the large responsibilities in my mind to walk of the stage as soon as the successor is ready to take over. This provides the needed freedom and space for the new CEO to drive the changes, he or she seems fit, which is the overarching goals of any change in leadership. This is why I recommended to the Board, that I do not stay on as Chairman. I will still be attached to the Company for a period ready to be an advisor to Mark and Olivier as required. But beyond that, I will step completely into the background.

In closing , I would like to thank the entire investment community for the enjoyable and constructive working relationship we've had over the past decade. I would also like to thank my management team, you are all amazing and also the Board of Directors, our entire organization, our customers and our partners for their support. I'd in many ways miss being part of all of this, but it's now time to move on to the next chapter.

Thank you. We will now open up for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question is from James West with Evercore ISI. Please go ahead.

James West -- Evercore ISI -- Analyst

Hey, good morning guys.

Paal Kibsgaard -- Chairman and Chief Executive Officer

Good morning, James.

James West -- Evercore ISI -- Analyst

And Paal, congratulations on a 22 year run at Schlumberger, including 10 years at the top and the modernization of the transformation of the company. Well done. And Olivier, congratulations on your appointment as CEO.

Olivier Le Peuch -- Chief Operating Officer

Thank you.

Paal Kibsgaard -- Chairman and Chief Executive Officer

Thank you.

James West -- Evercore ISI -- Analyst

So, Olivier, I guess you're up now. So as you take over here from Paal and Paal outlined a number of the initiatives that have been under way over his tenure and especially the last several years during the downturn. Could you perhaps give us somewhat of an outlook or some guidance on how you see your strategy unfolding over the next several years? Where the kind of the key points, at least some preview of your strategy, I know you're going to outline that more detail later on this year, but if we get a preview, that'd be great.

Olivier Le Peuch -- Chief Operating Officer

James, I think you will understand my short-term priority is clearly to complete first the transition report, and to focus on execution during the upcoming weeks and months as we're going to free to register opportunity set, that this new market outlook presents to us. I will gradually indeed, communicate the [Indecipherable] strategy during the next few months and quarter as we mature and deploy initially with the leadership team going into 2020. I don't think it's appropriate for me to deploy and interlease preferred to postpone that in setting in setup that would be more appropriate. So that could develop and then expose all of you to the right -- to the right priority going forward.

James West -- Evercore ISI -- Analyst

Okay, understood. And then maybe a follow-up, a lot of the recent adjustments within Schlumberger have been to move to a more capital-light structure to drive returns higher. I know Paal outlined several of these transact -- recent transactions, should we expect more of this in the future? Or has the asset base or the business mix and portfolio been cold enough at this point or is there more to come?

Olivier Le Peuch -- Chief Operating Officer

I think first, I think this is nothing really new we have started that two or three years ago and I think we initiated this in larger scale with the WesternGeco transaction about the year, year and half ago. So I think we are -- followed the management team agreed that we need to be clinically at every business we own and look at the return on assets and return on capital and then use a proactive approach, do anticipate and use every opportunity that exists in the market to either separate or do and run it hardly. And as I just said, at the very closely to two of them, the rig deal with ADC in Middle East and [Indecipherable], as I believe that it was not necessary for the asset, but it was more for creating this unique joint venture that would change the market. When we stop there, I think it will depend on the market conditions for one. And two, upon the results of some [Indecipherable] of the strategy. But clearly, we will continue to look at every way, we can improve our return on capital, return on equity and improve -- and improve IOC for the company. So that's trust -- trust me and trust us on this for the future.

James West -- Evercore ISI -- Analyst

Very good. Thanks, Olivier.

Operator

And next, we go to line of Angie Sedita with Goldman Sachs. Please go ahead.

Angeline Sedita -- Goldman Sachs -- Analyst

Good morning, good afternoon, guys.

Olivier Le Peuch -- Chief Operating Officer

Good morning, Angie.

Angeline Sedita -- Goldman Sachs -- Analyst

Hi. So I echo James' remarks, certainly congratulations, Paal, on entering the next chapter of your career and we really enjoyed very much working with you and your willingness to meet with investors in the Street regularly is appreciated.

Paal Kibsgaard -- Chairman and Chief Executive Officer

Thank you, Andy.

Angeline Sedita -- Goldman Sachs -- Analyst

So I think the first question for me is to Olivier or Paal or either one of you both. Is, I think it's really interesting to see this announcement with Mark Papa as Chairman of the Board. I'm not sure, but is this the first time that a non-exec has been named Chairman for Schlumberger? And it'd be helpful to hear the rationale around the decision, is it corporate governance? Is that a focus on US land markets or the general strength of Papa and is this long-term position or is this an interim position?

Paal Kibsgaard -- Chairman and Chief Executive Officer

I wouldn't read too much into the details of this. I think the Board is following pretty much the same recipe as when I took over. There was a split of the office, Chairman and CEO also, when I took over, my previous as our CEO stayed on a bit longer, but also we had another non-executive Chairman, Tony Issac staying on for a couple of years after that as the Chairman as well. So the selection is basically down to what the Board has decided. And the split of the office at this stage is the same as what we did when I took over and what the Board decides to do going forward, I think will be -- will be up to the Board.

Angeline Sedita -- Goldman Sachs -- Analyst

Okay. Okay, that's very helpful. And then maybe for Simon it's been a lot of discussion on free cash flow and the dividend. I'm sure you've heard this as well. Maybe you can give us color around the outlook for free cash flow into the second half of 2019. Is it reasonable to think that it could be similar 2018 levels in the second half or $2.5 billion -- $2.9 billion I think it was last year. And in that context the importance of the dividend and the dividend coverage, which is roughly 1.25 times.

Simon Ayat -- Executive Vice President and Chief Financial Officer

Okay. Thanks Angie. Let me just elaborate a bit on the cash. Since noticed in the second quarter we performed better than last year. We -- although we expected better, actually we were some delays in collection in certain geographical regions, but that put us at six months level better than last year. We expect the second half to even be better than last year as well. As you know, we always perform during the second. We consume liquidity during the first half because of working capital, and we improve it during H2 of every year. And this year it's not going to be an exception. We will continue the trend. And you will see that this thing we're very confident on it, our plans shows that the cash flow in the second half will be quite healthy. And this takes me to this issue of the dividend coverage and return of capital. We obviously -- we haven't been producing enough cash to cover the return on capital, but we -- we know that this is a priority, this is an objective. And we comfortable by this level of cash flow -- free cash flow will be reached. And we will be able to cover our commitment to the return of capital to the shareholders.

Angeline Sedita -- Goldman Sachs -- Analyst

Okay. And then if I could slip one more in, I mean with Paal's announcement on his resignation it's only natural to think about the CFO succession while we clearly love you Simon. We'd love to hear if there is any background on the heir apparent and just general timing?

Paal Kibsgaard -- Chairman and Chief Executive Officer

Well, I would, I'll make the bold statement and say that Simon Ayat will most likely retire at some stage, a date hasn't been set yet. And I think the date will be set in between Olivier, Simon and the Board and the succession will be carefully planned and we will inform the market when we are ready.

Angeline Sedita -- Goldman Sachs -- Analyst

Right. Thanks. I'll turn it over.

Operator

And next, we go to a question from Scott Gruber with Citigroup. Please go ahead.

Scott Gruber -- Citigroup -- Analyst

Yes, good afternoon to you all and I'll reiterate the dual congrats to both you Paal and to you, Olivier.

Olivier Le Peuch -- Chief Operating Officer

Thank you.

Paal Kibsgaard -- Chairman and Chief Executive Officer

Thank you, Scott.

Scott Gruber -- Citigroup -- Analyst

And Olivier, I realize it's early days, which is following up on James' strategy question, the question we often get from investors is on OneStim, is this considered a core for Schlumberger and how do you think about that business going forward within the portfolio, within the context of trying to reduce the capital intensity of the overall portfolio?

Olivier Le Peuch -- Chief Operating Officer

Yeah, good question, Scott. I think first and foremost, I think [Technical Issues] to participate into the North America land market. It's to be to ignore [Phonetic] and I believe that ability to extract value, more focused on those -- a technical challenge and credit efficiency for industry is critical. So that's the reason why I think we are steadying the market, invested in technology to extract value and meet our customer expectation there.

Going forward, we will obviously look at the way we run this business and look at the optionality going forward of doing it differently. But for now, I think we are in this business to make it [Decipherable]. We have made improvements on efficiency. We are working more closely with the international [Technical Issues] are going in the basin, also with some large independents and they're acknowledging of the efficiency and the impact we can provide. Now the future is the future and we will determine on the outlook of the markets, where is our position and be smart about when to take [Technical Issues] and manage the capital allocation accordingly.

Scott Gruber -- Citigroup -- Analyst

Got it. And a follow-up on IDS, I was a bit surprised to hear some weakness in the IDS portfolio during the quarter. Can you just discuss what happened in the segment during the quarter, was this just a speed bump? Is there something more to be concerned about here? And then given the outlook for IDS in the second half how do we think about the outlook for the drilling segment in the second half of the year? I think the original expectation was for overall revenue growth and drilling for the year of around 10% and the incrementals of 20% to 25%. How should we think about those two items for the rest of the year?

Olivier Le Peuch -- Chief Operating Officer

Yeah. Let me first come back on to the Q2 drilling performance as I think two or three things played at the same time. Actually internationally, excluding LSTK, compiled with IDS, the product line performed very well, and as the growth internationally and improved our margin. Unfortunately, this was offset by the significant activity drop in North America both coming from the break up and coming from lower rig activity by 5% into the land. Combined with this, indeed the total IDS sequential was actually lower than in Q1 and this is due to three things. First Iraq, where we completed a project, next India as an activity that is linked to the project. And last, we had only a flat revenue or flat activity quarter-on-quarter in Saudi. So Saudi is, I think for LSTK contract and well an necessary piece where we are on the performance. But as any projects we are focusing on improving quarter-on-quarter on performance, taking our earnings and trying to improve from this to accelerate the learning curve. This backed our commission in Saudi. We had geological well condition and operational issue that both combined to create a setback for execution. But I spend quite some time reviewing the team, have been with the team on the ground and I'm very confident, actually the team has understood the gaps both technology and operational execution, and that will gradually see improvement of our performance in the LSTK contract in Saudi and that converge into the ambition we had, which is to reach and being accretive from this execution to the drilling group margins.

Scott Gruber -- Citigroup -- Analyst

Do you think that margin convergence can happen by the end of the year?

Paal Kibsgaard -- Chairman and Chief Executive Officer

I think we will review the progress during the third quarter and planning to stand back and be with the team sometime later this quarter to review progress. And then we'll at that time review which -- or action we need to take if we're short.

Scott Gruber -- Citigroup -- Analyst

Got it. I appreciate the color. Thank you and congrats again.

Olivier Le Peuch -- Chief Operating Officer

Thank you.

Operator

Next we'll go to line of Kurt Hallead with RBC. Please go ahead.

Kurt Hallead -- RBC Capital Markets -- Analyst

Hi, good afternoon in Paris. And Paal, I'll go the same path, I really appreciate your accessibility. I know you've done the absolute best you could in a very, very difficult environment. So, kudos to you and look forward to what your next take is going to be. And Olivier welcome aboard, and look forward to get to know you and work with you, so kudos on both fronts.

Paal Kibsgaard -- Chairman and Chief Executive Officer

Thank you.

Kurt Hallead -- RBC Capital Markets -- Analyst

Yes. So I guess my line of questioning here with maybe focus on some of the operational dynamics and I was wondering whether Paal or Olivier either one, can you speak to the progress, that you've made so far in improving the margins on the underperforming international contracts?

Olivier Le Peuch -- Chief Operating Officer

So, as I have said in my prepared remarks, I think we initiated some key initiative on the earlier this year to focus on both the contract and the very specific underperforming business units, and not only doing reviews, but also making actions to change the contract and/or to work with the customer to improve those. So yes, we have made -- we have made progress, and I think if you -- business units or contracts that were particularly duties have transferred into neutral or accretive during the quarter. And this is visible, as I said, more than two-fold of our product line of expense growth, during internationally, during -- in the quarter. And all of them, expense in growth, actually expense improved margins quarter-on-quarter, which I believe is the first [Technical Issues]. I think is due to some of these heightened focus on to this under-performing business units. So, no, it's not over, we see another few business units or contracts or execution area where we are not satisfied, and I think we have acknowledged this. We have all eyes on this issue. We're working with the team to improve those, occasionally with customers, so that, we improve our performance and continuously -- we will gradually improve margins going forward.

Kurt Hallead -- RBC Capital Markets -- Analyst

Okay, appreciate that color. Thank you for that. And then my follow-up question would be, can you give us some general insights on what you see in terms of pricing trends for your drilling related business lines and frac business lines in the U.S. as well as, what you've been experiencing lately for pricing outside North America?

Olivier Le Peuch -- Chief Operating Officer

So first starting with North America, I think the pricing is still a little bit depressed on balance, both due to the rig activity decline that we have experienced for the last few months, combined with the excess capacity that still sit into the North America business. Now this being said, with the right technology, with the right value creation, with the right efficiency, we are capturing either of the performance or to technology setup the pricing mix, that I think is fair level, and we have seen that in our -- and recess technology in the North America. We have seen that as a I mentioned in Surface MonoFlex. We have seen this into some very specific dedicated fleet contract that we have with OneStim, and this help us mitigate the exposure to the spot price market, that keeps going down in the market.

Now by contrast internationally, while the market is not uplifting the price on the large trend for sure, and we still see a very much, very highly competitive on balance across the [Indecipherable]. We see that in some spot geography albeit offshore, albeit in more remote geography with the right technology, beating exploration or between drilling for difficult wells and difficult condition. We are starting to obtain updates and upgrades on our pricing commission or simply getting the mix that is more favorable to our margins, and as such as I've commented before, several product line internationally have had quite robust pull-through in the last quarter.

Kurt Hallead -- RBC Capital Markets -- Analyst

Thank you. Appreciate that.

Operator

Next, we go to the line of Bill Herbert with Simmons. Please go ahead.

William Herbert -- Simmons -- Analyst

Good morning. You express basically that you expect the market to remain balanced, when one can make a case which is shared by I think both the IIA and OPEC, that non-OPEC supply certainly 2020 is going to significantly outpace global demand growth. Call on OPEC is low water [Phonetic] and the only thing keeping oil prices where they are is a combination of rational guardianship on the part of Saudi and GGC on the one hand and embargo and quarantined oil in the form of Iran and Venezuela. So walk me through your thesis as to why you think the market stays balanced?

Paal Kibsgaard -- Chairman and Chief Executive Officer

Well let me take on that one. So overall, what we're saying is that the balance between demand and supply, as we see today, we don't see it changing dramatically as we go into 2020. The main issue I think around the oil price today is the negative overhang around trade, and what the implications of that is going to be for the medium to long-term. So I think in our assumptions, we expect that there will be some type of resolution to this, that it's not going to, go on for a long time. And that with that, we will not have a structural change to the global demand outlook.

On the supply side, as I said in my prepared remarks, we see a gradual fall of the supply additions from the projects that were sanctioned and largely funded prior to 2015, and this will further expose the accelerating decline that we see in the -- in the more mature production base. You can look at Norway, UK, Nigeria, Indonesia, Mexico and so forth, and you will see there that even the nonpresalt in Brazil, you will see that there is significant declines taking place there. And I think with that, we don't see a major tailwind on non-OPEC production outside the U.S. in 2020. And we also the lower investment levels in the U.S., there will be growth in 2020 in the U.S., but I think it's going to show a decelerating pace and that's why when you combine all of these things, we believe that the current situation is roughly where we will find ourselves also in 2020.

William Herbert -- Simmons -- Analyst

Okay. Well, time will tell. And I hope you're right. And the second question is with regard to views on the third quarter, if you could talk about that, your comfort level with Street estimates, etc. Thank you.

Paal Kibsgaard -- Chairman and Chief Executive Officer

Olivier?

Olivier Le Peuch -- Chief Operating Officer

Yes. I think just to give a little bit of light on this, so we do anticipate a similar earnings step up sequentially during the third quarter. And as such, we believe that the current Street estimates are achievable, however, with no visible upside. Indeed, we expect the momentum in international growth and relative margin expansion to continue, that's what we have seen. And we do anticipate also the North America outlook to remain actually challenging, as a result of sustained pricing pressure and limited of no activity increase particularly for drilling. So that in all, will result into the gallons of ship.

William Herbert -- Simmons -- Analyst

Okay. Thank you.

Paal Kibsgaard -- Chairman and Chief Executive Officer

Thank you.

Operator

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

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

Hi. Good afternoon, everyone.

Olivier Le Peuch -- Chief Operating Officer

Good afternoon.

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

I wanted to go back -- I wanted to circle back to the dividend, this is something that we discussed when you're at our conference in New York last month, but it seems worth addressing here in this forum, as it's a common investor question. So Olivier, could you maybe speak to your commitment to the dividend as you step into the seat? And Simon if we could maybe you look beyond '19, could you walk through the levers that are at your disposal to cover the $2 dividend with earnings and cash flow, if we end up in a lower for longer scenario in terms of how the macro unfolds?

Olivier Le Peuch -- Chief Operating Officer

So let me first reiterate what I said, indeed to the investor community back in New York is that, we are committed and I'm personally committed to the dividends. I will not be the first CEO to be step back on this commitment. So count on me and count on the team and the commitment we have in to the operating margin improvement and working capital improvement to make it steady and a rarity going forward.

Simon Ayat -- Executive Vice President and Chief Financial Officer

Okay. Let me, let me just repeat a little bit what I said about the cash. With the performance that we have achieved in the first six months and what we anticipate in the following six months and helped a bit by the divestitures that we have announced, we're going to cover everything and overall reduce our net debt. Slightly, but we will, which in other words, we will reduce our net debt, which is a borrowing and we wouldn't be able to cover all the commitment, the dividend and the continued buyback that we are performing on a quarterly basis to avoid the increase in the share count, as a result of the stock-based compensation. Now I'm going to go and confirm on our expectations for next year. Next year 2020, our forecast today that the dividend will be covered through -- the generation of cash from operation and we will be able to cover the -- again the dividend and we will continue with this as small buyback. So, the commitment to dividend as Olivier mentioned and historically, there is no question about us maintaining the dividend. And I think given our forecast and what we see the way we're going to conduct the working capital and the investment in the projects, we will have ample cash to cover it.

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

Very good. Thank you for that. I think that's...

Paal Kibsgaard -- Chairman and Chief Executive Officer

And on the divestiture, let me finish on the divestiture. You have a three divestitures, which are close to a $1 billion and what we anticipate -- what we included in our scenario for this half is at least two of them will be completed in the second half.

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

Thank you for that. And I think they will be well received. We haven't spoken on Cameron yet, and so I was hoping to get a little more of the outlook there, maybe confirmation from your perspective that we've had a trough in the margins in the first half of the year, perhaps in the first quarter. In the release, there was some nice contract wins with Chevron and Shell I noticed. How do you view market share in subsea perhaps in pricing as well, as integrated projects are becoming a bigger part of the demand mix there?

Olivier Le Peuch -- Chief Operating Officer

Good question. Thanks. I see first that Cameron Group continued to perform very well. I think you have seen the long-cycle business could be -- continue to increase backlog, now an excess of $2.7 billion mostly from subsea. And the short cycle as well is continuing to maintain share in North America, and gaining share internationally. So you have seen that mix including share internationally for the short cycle and maintaining share and rebounding from the activity long-cycle rebounds is combining to help us, with not only growth but also its margin improvement over the period.

So I think the margin, yes, I think we have made that comment that we believe the margin trough to be honest. And I believe that this is roughly the case, and I think we are -- we see going forward, steady growth build on the backlog that the long-cycle have accumulated and build on the further gain on the international growth. As we have seen international growth was across the full product line, in Q2 sequentially, we expect this to continue in the second half and this is built on the leverage of the GeoMarkets franchise, that have started to take place and it is giving a tailwind to the Cameron organization.

Now more specific to subsea, I'm very pleased with the engagement and the relationship and the alliance we have with Subsea 7. We have actually in connection with this, we have received the required antitrust clearance. And as such, we have accelerated, elevating allowance to -- now having dedicated management, joint management structure, that overseas not only the engineering, but also the pursuit of new opportunity to get a product, and the execution of projects doing integration. The result of which, I think you may have seen it, we're quite successful in the last few quarter to gain against competition, integrated the joint project. And I think the feedback that I've received personally from the customer on that [Indecipherable] team have received from the customer is excellent both on the execution. But also, as we presented one team to the customer, we also offer them the optionality to choose us independently and go with either self-package or the SPS package.

So I'm confident that this integration will continue to be a success for both company and I'm very confident that we -- with regards to OneSubsea, the leadership they have on the tieback, compression and execution track -- they have the execution company in subsea to what I've seen. They're technology edge on the -- on subsea processing, including compression, and you have seen the recent award from Shell, Ormen Lange in Norway against major awards that cements our leadership into subsea processing system, that have the reliability and deliver the deliver the [Indecipherable] that the customer wants. So very well aligned and I'm confident.

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

Very interesting. Thanks Olivier.

Operator

And our next question is from Dave Anderson with Barclays. Please go ahead.

J. David Anderson -- Barclays Capital -- Analyst

Hi, good morning Olivier. Just a question on the offshore side, I think you had said in your remarks that your shallow water business was up 40% from the first half of the year -- year-over-year. But I was also really more curious about the deepwater side, a floating rig counts of 20 rigs or so this are beginning this year, see more FID exploration activity. Is this lining up for sort of an inflection in the deepwater part, the market which is so important to Schlumberger business, is that a 2020 event? Is it too early to tell? Can you just kind of help us understand kind of how the deepwater markets is framing up for you?

Paal Kibsgaard -- Chairman and Chief Executive Officer

Yeah. Thank you first for correcting the number, maybe I misspelled it, but it was 14%, one-four-percent shallow water rig activity, that is continued growth. The deepwater is seeing less growth of rig activity at the moment, more single-digit. Yes, we are seeing FID, there is quite a number of FIDs that are lining up in the third and fourth quarter of this year, that would translate in further growth and acceleration of deepwater as we expect into next year.

Now the offshore activity at large, I think it is very solid on shallow, both in Middle East and in Asia. And the deepwater is seeing the rebounds of activity in the -- in the West Africa at large. So I think the combination of this is very favorable. As I did comment in my prepared remarks, the offshore exploration is up more than 30% [Phonetic] year-on-year, year-to-date and this benefits very much Wireline. So the deepwater activity is more late cycle increase that we'll see from the second half and into next year.

J. David Anderson -- Barclays Capital -- Analyst

Great. Thank you. A completely different subject. North America, I'm sure you're getting bombarded with the talk of E&P capital discipline like everybody else is. But, and I know you don't know exactly how the year is going to play out, but fourth quarter activity kind of looks like it could happen similar to last year. Is that how you're preparing your business right now for sort of the cadence of spending North America to look similar to last year? And if so, what does that mean? Does that mean that you're prepared to stack more equipment? How do you prepare your business for that type of market which could potentially fall-off in the back part of the year?

Olivier Le Peuch -- Chief Operating Officer

No, you're correct. That's the assumption we're also taking. I think we do expect and anticipate that the combination of seasonal slowdown and budget exhaustion, we create a trough in the fourth quarter as we have experienced last year, but will be followed most likely by our strengthening and [Indecipherable] activity in Q1, across the area. So we are prepared for this, we have done it last year, we'll be agile. We will be certainly stacking some equipment, would be going and doing the -- what is necessary to withstand this trough. But we are ready for it. I think agility as well the one of the focus of the team, both in organization and into responding to the market trough and [Indecipherable]. So we will do that again this year.

J. David Anderson -- Barclays Capital -- Analyst

Alright. Thank you, Olivier. We look forward to hearing from you later this year on your new broader strategy. Thank you.

Paal Kibsgaard -- Chairman and Chief Executive Officer

Thank you.

Operator

And next we'll go to a question from Jud Bailey from Wells Fargo. This is our last question. Please go ahead.

Judson Bailey -- Wells Fargo Securities -- Analyst

All right. Thanks, and good afternoon to you guys. First of all, Paal, there has been good working with you over the years and good luck on the next chapter for you and Olivier I'll tell you also congratulations to you as well.

Olivier Le Peuch -- Chief Operating Officer

Thank you.

Judson Bailey -- Wells Fargo Securities -- Analyst

Yeah. My question, I guess Olivier just thinking a little bit bigger picture on North America, kind of given the outlook that it looks like the U.S. market doesn't really needed to grow for maybe next couple of years. How are you thinking about getting margins higher in that business? You kind of talked a little bit about OneStim, a little while ago, but what about this North American more broadly? How do you drive better margins in that business and in this market where year-over-year may be flat, but you're also having to navigate some pretty severe seasonal swings as well quarter-to-quarter?

Olivier Le Peuch -- Chief Operating Officer

No, that's the challenge that we all face and I think the way we are addressing this is twofold. First focus on our own [Speech Overlap] efficiency and our own productivity. And I think we have deployed several parts of business system, digital tools and technology that improve our own surface efficiency that's the important the way we operate, deploy equipments and run remote operation in the North American basin and that has over time proven to be pulling through and helping to protect our margins. Now the second aspect is reservoir efficiency for addressing the gap of technology, that the customer looking for to address some of the technical challenge and the specifics of [Indecipherable] interference and all the specific performance contract that some of the major are ready to engage with us. So playing on both, continuing our execution on productivity, efficiency, modernization, which has already gained a lot of pull-through and aligning more with some clinical customers, part on the technical challenge or around when we done like we did with [Indecipherable], New Mexico, around performance-based contract, and then using, leveraging our system performance to extract the margin. Both, this will be played want to protect our cost structure and to be more productive than they will want to uplift and capture some of the value with our customers. So this will [Technical Issues] protect and increase our margin going forward.

Judson Bailey -- Wells Fargo Securities -- Analyst

Okay, all right. I appreciate that. My follow-up is on the third quarter commentary, I think I believe you said you're comfortable with where consensus is. And I wonder, just to understand a little bit better. Does that envision our recovery a little bit better, margin trajectory from the drilling business which step down this quarter to hit third quarter consensus? Do you envision that your drilling margins are probably more inline with where you would have expected earlier in the year, just help us think about margin progression and how you're thinking about that the various segments?

Paal Kibsgaard -- Chairman and Chief Executive Officer

Yeah, absolutely, I think the mix will be a little bit different or did similar trajectory for international. I would expect that some of the setback, we had in the second quarter will resolve themselves, and activity mix will present itself for opportunity for drilling to perform slightly better next quarter.

Judson Bailey -- Wells Fargo Securities -- Analyst

Okay, great. Thanks. I'll turn it back.

Olivier Le Peuch -- Chief Operating Officer

So, ladies and gentlemen, thank you very much. So before we end today's call, I would like express few closing comments. Firstly, I want to reiterate my word of appreciation to all the Schlumberger employees, we did contribute to last quarter success. Our segment performance, second quarter performance were both solid on earnings and cash flow generation, at the back for both international and offshore market recovery, partially offset but it does is some challenge in North America land market. We did respond very well to this similar setting, leveraging our international footprint; our technology portfolio strength; and our efficiency and performance execution, with most of product lines and geography posting material revenue growth quarter-on-quarter. Our elevated focus on service quality and low performing business units and strict prioritization of capital allocation, I've also assorted in margins improvement internationally.

Additionally, we are working closely with our customer in fact, more performance from a single contract, and we are jointly planning the mobilization of the upcoming activities in response to the increased concern about future supply of resource and technology. Looking forward, despite the fears of global trade and geopolitical tensions, the connectivity trend looks set to continue with into the second half of the year, with the next quarter, driven by strengthening activity and increasing international spend, whereas we anticipate the North America land market to provide [Indecipherable] from pricing pressure and little or no income or productivity.

We believe that this market conditions continue to align very well with operational strengths, particularly on our ability to generate much differential earning potential. And we expect that the momentum initiative during the second quarter to continue during the remainder of the year. Finally, I would like to express my sincere thanks to Paal for his support and guidance during the past six months, while recognizing the contribution he has made to the Company for the last decade. I had the privilege to work side-by-side with Paal during most of the last 10 years, and I've been very impressed by his unique leadership skills and his ability to steadily transform the company in a very difficult period and propel Schlumberger for future success ahead of a new growth cycle internationally.

I believe in particular that the modernization platform and a digital technology dealership developed during the last few years. We represent a unique foundation upon which we will develop our next chapter with an increased focus on cash and returns. I look forward to continuing to engage with the investor community, during the quarter and we pull up to see many of you, Clean Energy Conference, early September.

Thank you for your attention and participation to this call.

Operator

[Operator Closing Remarks]

Duration: 65 minutes

Call participants:

Simon Farrant -- Vice President, Investor Relations

Simon Ayat -- Executive Vice President and Chief Financial Officer

Olivier Le Peuch -- Chief Operating Officer

Paal Kibsgaard -- Chairman and Chief Executive Officer

James West -- Evercore ISI -- Analyst

Angeline Sedita -- Goldman Sachs -- Analyst

Scott Gruber -- Citigroup -- Analyst

Kurt Hallead -- RBC Capital Markets -- Analyst

William Herbert -- Simmons -- Analyst

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

J. David Anderson -- Barclays Capital -- Analyst

Judson Bailey -- Wells Fargo Securities -- Analyst

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