Schlumberger Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
January 20, 2022

Key Takeaways

  • Schlumberger posted Q4 revenue up 6% sequentially with all four divisions growing, marking its sixth consecutive quarter of margin expansion and generating $1.9 billion in operating cash flow.
  • Full‐year 2021 delivered the highest global operating margins in six years, underpinned by a 160 % increase in Delphi digital users, 240 commercial Delphi customers, and progress in new energy ventures such as hydrogen, CCUS and stationary storage.
  • For 2022 the company sees mid‐teens revenue growth—driven by at least +20 % North America capex and low‐to‐mid‐teens international spending—with a goal to expand EBITDA margins by 200 bps versus Q4 2021 and reach ≥25 % in H2 2023.
  • Strong cash generation in 2021 ($3 billion free cash flow) drove net debt down by $2.8 billion to a five-year low; 2022 CapEx and APS investments are guided at $1.9–2.0 billion while targeting “triple-double” returns (double-digit free cash flow margin, return on sales and ROCE).
  • The company’s strategy centers on three growth engines—core services, digital integration and new energy—supported by its returns-oriented basin/division model, capital stewardship program and commitment to decarbonization.
AI Generated. May Contain Errors.
Earnings Conference Call
Schlumberger Q4 2021
00:00 / 00:00

There are 12 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Schlumberger Earnings Conference Call. At this time, all participant lines are in a listen only mode. Later, there will be an opportunity for your questions. Instructions will be given at that time.

Operator

And we will assist you offline. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to N. D. Madhuamezia, the Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, Leah. Good morning, and welcome to the Schlumberger Limited 4th Quarter and Full Year 2021 Earnings Conference Call. Today's call is being hosted from Houston following the Schlumberger Limited Board meeting held earlier this week. Joining us on the call are Olivier Lepusch, Chief Executive Officer and Stephane Biguet, Before we begin, I would like to remind all 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.

Speaker 1

I therefore refer you to our latest 10 ks filing and our other SEC filings. Our comments today may also include non GAAP financial measures. Additional details and reconciliation to the most directly comparable GAAP financial measures can be found in our Q4 press release, which is on our website. With that, I'll turn the call over to Olivier.

Speaker 2

Thank you, Andy. Ladies and gentlemen, thank you for joining us on the call today. In my prepared remarks, I will cover our Q4 results and full year 2021 achievements. Then after, I will follow with our view of the 2022 outlook and some insights into our near term financial ambitions. Stephane will then give more detail on our financial results, and we will open for your questions.

Speaker 2

The 4th quarter was characterized by broad based activity growth. With continued momentum in North America, activity acceleration in international markets and an accretive offshore market contribution, Upon which we delivered strong sequential revenue growth, our 6th consecutive quarter of margin expansion and outstanding double digit free cash flow generation. These financial results conclude an exceptional year of financial performance for Schlumberger

Speaker 3

at a

Speaker 2

pivotal time for the company and in our industry at large. Underlying these results are the following highlights from the quarter. Geographically, 2nd share growth in North America FEED exceeded rig activity, growing in excess of 20% offshore and international revenue growth accelerated, Closing the second half of twenty twenty one, up 12% versus the prior year. All international areas posted growth driven by gains in more than 75% of our international business unit. Right division.

Speaker 2

Revenue In all four divisions grew sequentially and when compared to the same period last year. Digital integration led growth, posting Double digit sequential growth and record high margins. Well Construction and Reservoir Performance, our predominantly service oriented divisions, outperformed expectations with strong sequential growth and approximately 30% growth year over year on a pro form a basis. Production Systems, we call it year end sales, which drove mid single digit growth, though partially impacted by logistics challenge. Operating margins expanded in spite of seasonality effects, improving further beyond pre pandemic levels.

Speaker 2

And finally, we generated outstanding cash flow from operations exceeding $1,900,000,000 in the quarter. All in all, I'm very pleased with our operational execution, our safety performance and our financial results through the Q4. Now let me briefly reflect on what we achieved in 2021. In our core, we fully operationalized our returns strategy leveraging our new division and basin organization to seize the start of the upcycle. In North America, This resulted in full year top line revenue growth, excluding the effects of divestiture and significantly expanded margins, achieving double digits, one of the financial targets we laid out in 2019.

Speaker 2

Internationally, we also grew the top line and expanded margin significantly as international activity strengthened in the second half of the year. This also resulted in full year international margins that exceeded 2019 levels. Taken together, these margins result in the highest global operating margins of the last 6 years, setting an excellent foundation for further expansion as activity accelerates and market conditions further support pricing improvement. In digital, our second engine of growth, I'm very proud of the momentum we established during the year. We advanced on our goals to expand market access and accelerate adoption of our from AI capabilities and powerful digital tools to reduce cycle time, improve performance and lower carbon intensity.

Speaker 2

We built partnerships to achieve comprehensive cloud access globally, collaborated with AI innovators to deploy machine learning and AI solutions and enabled digital operations through the automation of key workflows in well construction and production operation. At the end of 2021, we have more than 240 Commercial Delphi customers, recorded more than 160 percent Delphi user growth year over year and saw a more than tenfold increase in compute cycle intensity on our Dev Free cloud platform. We also made significant progress in our data, business stream and digital operation, advancing our OSDU commercial offerings, Autonomous Drilling and the adoption of Agora Edge AI and IoT solutions with great success. The Q4 results, including significant uptake in digital sales and sizable incremental margin are clear testament of this success. In Schumacher New Energy, we continue to advance the development of clean energy technologies and low carbon projects.

Speaker 2

In 2021, we took a position in stationary energy storage, expanding our total aversable market and advanced all of our venture in hydrogen, Lithium, Geoenergy and a suite of CCUS opportunities, including our Bioenergy CCS project. Some notable milestones achieved include the signature of pilot agreements with Jandia, our hydrogen venture with Accello, Mittal, UziTech, Vika and Hanamics, leading companies in steel and cement. And in Celsius, our Geo Energy Venture, we secured 5 commercial contracts in Europe and 1 in North America for a prestigious university campus. This was also pivotal year for us in terms of our commitment to sustainability. We announced our comprehensive 2015 net zero commitment inclusive of Scope 3 emissions and launch the transition technology portfolio to focus on decarbonization of oil and gas operation with much success.

Speaker 2

In addition, Schubergen earned a AA rating by MSCI Amoun and ENGIE top performer award by Harte Energy, recognizing our sustainability efforts, our enhanced disclosure and a commitment to apply our technology and capabilities towards helping the world meet future energy demand. In summary, 2021 was a great year for Chouinardier. Beyond this operational and financial results and our ESG accomplishments, we made excellent progress in core, digital and new energy, the three engines of growth that support our success now and well into the future. Above all, I'm most proud of our people. Their unique ability to execute, remobilizing operation across the world through numerous pandemic constraints, Adapting the logistics and supply chain dynamics and setting new performance benchmarks, all of which earn the recognition of our customers.

Speaker 2

I would like to thank the entire team for delivering a year of our performance on every metric. They surpassed all of our targets this year and created momentum as we enter 2022, for which I would like now to share our outlook. Looking ahead, we have increased confidence in our view of robust multiyear market growth. Tight oil supply and demand growth beyond the pre pandemic peak are projected to result in a substantial step up in capital spending amid shrinking spare capacity, Declining inventory balance and supportable price. In addition, we expect more pervasive service pricing improvements in response to market conditions as technology adoption increases while service capacity tightens.

Speaker 2

In essence, 2022 will be a period of stronger short cycle Activity resurgence driven by improved visibility in the demand recovery and greater confidence in the oil price environment. And as all demand exceeds pre pandemic levels in 2023 and beyond, long cycle development will augment capital spending growth in response to the call on supply. This demand led capital spending growth sets the foundation for a strong multiyear upcycle. Indeed, this scenario has already been established. As the number of FIDs increases, service pricing has begun to and multiyear long cycle capacity expansion plans have started, particularly internationally and offshore as seen during the last quarter.

Speaker 2

Turning to 2022 more specifically. We expect an increase in capital spending of at least 20% in North America, impacting both the offshore and offshore markets, while internationally, capital spending is projected to increase in the low to mid teens, Building momentum from a very strong exit in the second half of twenty twenty one. All area and operating environment, Short and long cycle, including deepwater, are expected to post strong growth with upside potential as In this scenario, increased activity and pricing will drive simultaneous Double digit growth both internationally and in North America that will lead our overall 2022 revenue growth to reach mid teens. Our ambition is to once again expand operating and EBITDA margin on a full year basis, exiting the year of EBITDA margins at least 200 bps higher than the Q4 of 2021. In this context, let me share how we see the year unfolding.

Speaker 2

Directionally, while we are still experiencing COVID related disruptions, we anticipate typical seasonality in the Q1 with revenue similar to historical sequential trends, which will be seen most prominently in digital integration. This will be followed by strong seasonal uptick in the Q2 across all divisions, with growth further strengthening through the second half of the year, supporting our full year mid teens revenue growth ambition and EBITDA margin expansion. This growth and margin expansion trajectory Give us further confidence that we will reach or exceed our mid second ambition of 25% adjusted EBITDA margin before the end of 2023, leading to adjusted EBITDA that should visibly exceed 2019 levels in dollar terms. With this, I will now turn the call over to Stephane.

Speaker 3

Thank you, Olivier, and good morning, ladies and gentlemen. 4th quarter earnings per share, excluding charges and credit, was 0 point 41 dollars This represents an increase of 5¢ compared to the Q3 of this year and of $0.19 when compared to the same period of last year. In addition, we recorded a net credit of $0.01 bringing GAAP EPS to $0.42 This consisted of a $0.02 gain relating to the sale of a portion of our shares in Liberty Oilfield Services, offset by a $0.01 loss relating to the early repayment of $1,000,000,000 of notes. Overall, our 4th quarter revenue of $6,200,000,000 increased 6% sequentially. All divisions posted sequential growth led by digital and integration.

Speaker 3

From a geographical perspective, international revenue grew 5%, while North America grew 13%. Pretax operating margins improved 31 basis points sequentially to 15.8 percent and have increased for 6 quarters in a row. This sequential margin improvement was driven by very strong digital sales, which helped sustained overall margin despite seasonality effects in the Northern Hemisphere. Company wide EBITDA margin remained strong at 22.2%, which was essentially flat sequentially. Let me now go through the 4th quarter results for each division.

Speaker 3

4th quarter digital and integration revenue of $889,000,000 increased 10% sequentially, with margins growing by 268 basis points to 37.7 percent. These increases were driven by significantly higher digital and exploration data licensing sales, which were partly offset by the effects of the pipeline disruption in Ecuador that impacted our APS projects. Reservoir performance growth further accelerated in the 4th quarter, with revenue increasing 8% sequentially to 1,300,000,000. This growth was primarily due to higher intervention and stimulation activity in the international offshore markets. Margins were essentially flat at 15.5% as a result of seasonality effects and technology mix, largely driven by the end of summer exploration campaigns in the Northern Hemisphere.

Speaker 3

While construction revenue of $2,400,000,000 increased 5% sequentially due to higher land and offshore drilling, both in North America and internationally. Margins of 15.4 percent were essentially flat sequentially as the favorable combination of increased activity and pricing gains was offset by seasonal effects. Finally, Production Systems revenue of $1,800,000,000 was up 5% sequentially, largely from new offshore projects and year end sales. However, margins decreased 85 basis points to 9%, largely as a result of the impact of delayed deliveries due to global supply and logistic constraints. Now turning to our liquidity.

Speaker 3

Our cash flow generation during the Q4 was outstanding. We delivered $1,900,000,000 of cash flow from operations and free cash flow of $1,300,000,000 during the quarter. This was the result of a very strong working capital performance, driven by exceptional cash collections and customer advances. Cash flows were further enhanced by the sale of a portion of our shares in Liberty, generating net proceeds of €109,000,000 during the quarter. Following this transaction, we hold a 31% interest in Liberty.

Speaker 3

On a full year basis, we generated $4,700,000,000 of cash flow from operations and $3,000,000,000 of free cash flow. We generated more free cash in 2021 than in 2019, despite our revenue being 30% lower. This is largely attributable to our efforts of the last 2 years relating to the implementation of our capital stewardship program and high grading of our portfolio. As a result of all of this, we ended the year with net debt of €11,100,000,000 This represents an improvement of $2,800,000,000 compared to the end of 2020. We are proud to say that net debt is now at its lowest level of the last 5 years.

Speaker 3

During the year, we also continued to reduce gross debt by repaying $1,000,000,000 of notes that were coming due in May of this year. In total, our gross debt reduced by $2,700,000,000 in the last 12 months, thereby significantly increasing our financial flexibility. Now looking ahead to 2022. We expect total capital investments, consisting of CapEx and investments in APS and exploration data, to be approximately $1,900,000,000 to $2,000,000,000 as compared to just under $1,700,000,000 in 2021. This increase will allow us to fully seize the multi year growth opportunity ahead of us, while still achieving our double digit free cash flow margin objective.

Speaker 3

We are entering this growth cycle with a business that is much less capital intensive as compared to previous cycles. As a reminder, during the last growth cycle of 2,009 to 2014, Our total capital investment as a percentage of revenue was approximately 12%. We are therefore well positioned to fully reap the benefits of this growth cycle, with the potential for enhanced free cash flow margins and return on capital employed. With this backdrop, I would like to emphasize that based on the industry fundamentals and positioning of the company that Olivier highlighted earlier, Our financial outlook for 2022 is very strong. We have high expectations.

Speaker 3

And in 2022, we expect Triple double, consisting of double digit return on capital employed, double digit return on sales and double digit free cash flow margin. It is worth noting that we have not experienced this combination in a single year since 2015. Finally, I am pleased to announce that we will hold the Capital Markets Day in the second half of the year. This event will allow us the opportunity to provide you with additional details relating to Schumberg's strategy and financial objectives. Further information regarding this event will be forthcoming shortly.

Speaker 3

I will now turn the conference call back to Olivier.

Speaker 2

Thank you, Stephane. So I believe that we are ready to turn the call to you

Speaker 4

for the questions. Thank you. Thank

Operator

And our first question is from James West with Evercore ISI. Please go ahead.

Speaker 5

Hey, good morning, Olivier. Good morning, gents. So, Olivier, I liked your increased confidence and achieving mid cycle margins sooner rather than later. And I wanted to dig in a bit On why that confidence has increased. Obviously, we're starting at a bit higher level, but the target is a pretty solid target.

Speaker 5

And I'm Curious, what are the key drivers around that confidence increase?

Speaker 2

No. Thank you, James. Let me explain why we have increased confidence. And I think Some part of the answer on this question is in the quality of the results we have delivered in 2021 as a foundation. And next, I believe that the Current market conditions are clearly supporting our thesis for double digit CAGR growth over a few years.

Speaker 2

So in this backdrop, I think we have, we believe, 3 or 4 factors that will help us continue to guide upwards Our margin expansion. Firstly, I will set a foundation. The foundation we have put in place in the last 18 months, the operating leverage reset, The integration performance execution and the portfolio grading are here to stay. And this was already very visibly impacting the Service oriented division well construction and reservoir performance as you have seen Throughout the year and partly the second half of the second half of last year. And we saw where they surpassed already the 2018 margins performance.

Speaker 2

Secondly, I think the market mix. The market mix is set to improve and resonate to our portfolio strength. Increased offshore activity mix has already started to happen, and we expect this to only accelerate as the year unfolds and further into 2022. The adoption of technology also is accelerating, as you have seen, including digital, but our Fit for Basin, our transition technology and all the technology that extract performance for our operation are making an impact today and are getting further adoption by customer and giving us a premium. And finally, pricing.

Speaker 2

Well, a year ago, we are talking about Green shop pricing in North America. Today, we are seeing and we are already recording sign off pricing improvements On a broad market condition, both in North America and also internationally when we are getting awarded new contract as well as when we have to mobilize and deliver unique technology to our customer. So as the year developed, We believe that these attributes are foundation, operating leverage, our performance that differentiate and execution give us a premium, our market mix, Our technology adoption, success with customer and finally pricing, giving a tailwind to this, will drive and further expand our margin to the 2025 percent margin expansion. So it's not about if, but it's about when. And we have gained confidence and we have moved forward Our confidence on this into the 2023.

Speaker 5

Okay, great. That's very clear, Olivier. Maybe a second question for me. As we think about the cycle is really starting to take hold here. How should we think about the cadence of growth?

Speaker 5

You've given obviously numbers for 2022, But if we think about it by both geography and by division, where do you see the I guess The biggest growth, where could there be some lagging areas? I'd like just a little more color on that cadence would be very helpful.

Speaker 2

Maybe in one word, the market will be growth will be very broad across all geographies across all divisions, 1st as a backdrop. I think that's That's what we are realizing, and that's quite unique. But I think if I had to characterize first geographically or very high level, I think it's possibly a tale of 2 half with North America leading the uptick of growth activity growth in the first half, International further accelerating in the second half. While we did end on the H2 over H2 of 12%, We expect this to be the base in the first half and accelerate further in the second half internationally, so that we are even accelerating into 2023 for international activity. Secondly, I believe that if I have to characterize what will lead and be accretive to growth, I will say Americas land because of activity uptick, but I will also put Offshore, Environment These are the 3 engines of growth that we pull this year growth to the target ambition we have put at mid teens.

Speaker 2

So now per division, I think the service oriented division of Reservoir Performance and Well construction will be accretive to this, we expect, followed by because they are benefiting from the social environment, they're benefiting from the pricing and they have strong both NAM and international presence. So they are benefiting from long cycle exposure and In addition, the pollution system will also see growth Building on the short cycle exposure to North America and the backlog of contract that we have won in the last few quarters that will execute towards 2022. Funding on digital integration, it's a 2 phase of a division here. We expect the digital to be accretive to our growth, while it will be moderated by or visibly moderated by a flattish environment for APS production going forward. So that gives you the mix across the division and across the geographies.

Speaker 5

That's perfect. Thanks, Olivier.

Speaker 2

You're welcome.

Operator

Our next question is from David Anderson with Barclays. Please go ahead.

Speaker 6

Hi, good morning Olivier. So you gave you laid out the margin expansion Kind of how you're going to see that. I guess I have a question on the other side of that. Just thinking about mobilization of large tenders, You start up on the Jafar contract in the Middle East, but I guess typically what we've seen in the past is in these mobilization periods, there's these kind of extra costs They get weighed in. I'm just thinking about how that's looking in 2022.

Speaker 6

I mean, is that something that you think is You're going to have to absorb in 2022 and that therefore kind of 2023 is sort of another margin uplift there? Or has that improved pricing in some of these contracts

Speaker 2

I think, Dave, I think it's part of the mix of execution that we have. And I think we always mobilize for new products somewhere in the world. And we are committing to international growth and margin expansion this year. The last quarter was already Having witnessed of significant new project starts, yet we have marginally improved our margins last quarter, and we have seen the results Of the core division. So we did it already.

Speaker 2

So I think as we accelerate deployments, yes, we are very critically Assessing the cost of this start up, we are working for customer to minimize. We are using our digital operation to remote And optimize our deployment of resource. And we believe that what we have done in last quarter, we'll continue to do in 2022. So I think directionally, We are still set to improve our margin internationally in 2020, too, despite and building on this new product. So we are very, very keen to start all these new products.

Speaker 2

We are very proud of the Different contract award that we won last year, and I think this is part of the mix that we're executing. And the more activity and the more growth, We'll respond and continue to use efficiency and leverage our operating practice to minimize impact and engage with the customer to get full recognition of our investment.

Speaker 6

Understood. Okay. On the digital and integration side, it grew really nice in the top line this quarter. I was just curious, is that related to more new sales of How much that digital portion grew this year? I'm assuming it outgrew the 8% overall top line.

Speaker 6

But if you could provide any color on that that would be really appreciated.

Speaker 2

Yes. Let me give you a little bit of color into this. So first, I think if I had to characterize, I think the We've seen in digital sales at the end of the year is not a pure year end sales effect on 1 or 2 large contract and 1 or 2 application and software It's broad. It's very diverse. It's touch and expand upon the platform strategy That developed different revenue streams.

Speaker 2

So it's about new Delphi Cloud customer. And you have seen we've announced and have progressed one more time in last quarter. It's about new revenue monetization in digital operation, including Agora, including drilling, remote operation and automation. It's about new data business stream where we have been securing contract for OSDU Foundation, where we are the 1st to commercialize enterprise data management solution on this OSDU. And it's the follow through On the enterprise contract that we have won in 2021 or in 2020 on Delphi adoption.

Speaker 2

So it's significant it relates to the progress we have made in our platform. It relates to the acceleration of digital adoption by our customer and digital this pursuit of digital transformation by customer. And it translate into an uptick in each and every of the digital revenue stream we have created and the success from data to workflow and to operations. So it's diverse, it's broad It's multifaceted, so it's here to continue to expand. So I'm positive on this because it's not a one off.

Speaker 2

You see there is a year end sales effect there that will not they will not repeat in the Q1. But at the same time, it's something that I see expanding As a platform going forward, and we are in the early innings of this adoption. As we mentioned a quarter ago, we have 1700 digital customers. And we are in the early innings of deploying and pursuing This large installed base with transform digital transformation. So it was the first cycle of this digital And digital adoption, I trust this will continue in 2022 and accelerate beyond.

Speaker 2

Thank you.

Operator

And our next question is from Chase Mulvehill with Bank of America. Please go ahead.

Speaker 7

Hey, good morning everybody. Good morning, Olivier. So I guess first question is just kind of around this looming investment cycle That you and I and hopefully investors are starting to realize needs to happen. And you had mentioned that you expect Substantial increase in spending this cycle. So maybe you framed it a little bit, but so could you kind of Add a little bit of context about how you see this cycle shaking out, what gives you confidence in it and then what it means for pricing for OFS.

Speaker 7

The competitive dynamics have obviously changed, especially in international where it feels like you've got more disciplined, less players. And so just kind of frame the cycle and activity and where you see the most opportunity for growth and then ultimately what this could mean pricing this cycle for our test companies.

Speaker 2

No, thank you. A great, great question. I think the fundamentals we see them have not changed. And actually, Some characteristics of the cycle have accelerated, have been accentuated in the recent months. So the first attribute that we Put first is the outlook of economic GDP growth that, considering Concerning the oil intensity and energy intensity will still and will drive the oil demand as a key attribute Beyond the previous peak, no later than the end of this year according to the latest projection and is set to expand visibly beyond not only in for the next few years.

Speaker 2

Secondly, I think the supply demand imbalance And the supply, I would call almost call it crisis that we are facing is prompting not only an uplift onto the Community price, but also is prompting the investment return to investment across the broad portfolio of our customers. So you have seen it in North America. No surprise, but the North America is still and will remain structurally smaller than previous cycle to the capital discipline, but also due to the crunch of supply, including on the service side. Secondly, I think the international underinvestment for the last few years, Actually, the last down cycle combined with the dip in the last 2 years is scaling condition for unnecessary injection of Short cycle capital and then long cycle capital investment to respond to the supply. So we are seeing growth in North America, albeit a cut.

Speaker 2

We are seeing a rebound visible rebound In short and long cycle investments internationally, and I will insist on the long cycle Because I believe that both oil capacity is being looked upon and by some OPEC member to secure future supply market share, but also The international and major are investing into their advantaged offshore basins. And we are seeing not only in field drilling, But we are seeing FID for offshore that are accelerating going forward. So it's a mix of offshore rebounds, solid, including deepwater International short cycle and oil capacity in land and finally, solid growth in North America. So these are unique conditions that are tightening the capacity and that are creating the underlying pricing improvement condition.

Speaker 7

Okay, perfect. Appreciate the color. A follow-up to that would be, obviously, with this constructive backdrop For Sunburger in the OFS industry, you've got a wall of free cash flow coming to you. And so when we look at this, obviously $3,000,000,000 of free cash flow last year. And it looks like over the next 2 years, that should be growing.

Speaker 7

So how should we think about returning cash, how Schlumberger is going to return cash to shareholders. And then how does M and A fit into this capital allocation strategy Because obviously, you're trying to reshape the company for new energy ventures and things like that as well.

Speaker 3

Hey, Chase, it's Stephane. Look, I like your expression on free cash flow. It was indeed quite strong last year with EUR 3,000,000,000 Now, indeed, we visibly accelerated the deleveraging of our balance sheet, but we are not quite there yet At the leverage ratio, we committed to. So we have a clear line of sight now to achieving the target leverage we announced earlier, Even though there's still some uncertainty remaining in at the start of the year. Nevertheless, with the market fundamentals consolidating, Particularly in the second half of the year and into twenty twenty three, we have even more confidence indeed now in generating significant excess cash this year and beyond.

Speaker 3

So we will be able to maintain quite a healthy balance sheet and it will give us the flexibility to increase returns to shareholder as well as fund new growth opportunities. So we will certainly provide a comprehensive framework for future capital allocation As part of the Capital Market Day that we announced earlier, returns to shareholders are obviously important and increased dividends and buybacks We'll definitely be part of this equation.

Speaker 2

As it relates

Speaker 3

to M and A, sorry, I didn't answer on M and A. It's also part of what we will It's of course part of the toolbox and we'll you'll get more details when we give you that more comprehensive framework again.

Speaker 7

Okay. Look forward to it. Appreciate the color. I'll turn it back over.

Speaker 2

Thank you.

Operator

Next, we go to the line of Arun Jayaram with JPMorgan. Please go ahead.

Speaker 8

Yes, good morning. With the marginal supply source now moving from U. S. Shale to OPEC, I wanted to see if you could Frame, what kind of changes in spending patterns are you seeing from the NOCs Versus call it maintenance work versus FIDs and things to increase productive capacity.

Speaker 2

I think what we have seen and we are already witnessing today, I think, and is visible in Middle East but beyond, is the short cycle the return of Offshore cycle activity to assure, as you said, maintenance of production and with small but visible increment of Output supply. What we are seeing is also a commitment and some of the pipeline To increase oil capacity, sustain oil capacity for with a few country committing to participate fully and are laying out the foundation this year and next year into expanding the supply. But what we should not forget about and is partly true for Biderlist is there's also a gas market That is being very sustained, that has seen reinvestment, and it's part of the regional dynamic and that is already seeing is continuing to seeing Double digit growth. So I think it's a combination of gas market being sustained and having had less set back than all in the recent time, short cycle expansion and And long cycle acceleration with new FID capacity, and this is true from deepwater Brazil To the future investment in the current and future investment in Middle East or FID that are in the pipeline in Russia.

Speaker 2

So that's again very broad and that combined short and long cycle. And if you were to project, I think 2022 is a supply led activity rebound and 2023 The long cycle will further contribute going forward into well into 2023.

Speaker 8

Great. And my follow-up is your outlook on 2022 embeds 200 basis points of Year over year margin expansions, in the 4th quarter, so that would if I did my math right, that would put your EBITDA margins Based on the outlook, slightly above 24%. And so I wanted

Speaker 7

to speak a little bit

Speaker 4

As we

Speaker 2

exit, It's an exit rate. We made the comparison 200 bps or higher as we exit 2022 when compared to the second half For Q4 of 2021.

Speaker 8

Exactly. Okay, got it. I'll exaggerate. So as we think about 2023, your outlook is that you could Reach or exceed a mid cycle EBITDA margin of 25%.

Speaker 2

Second half. Second half. Yes. In the second half, we expect in the second half To reach or exceed indeed.

Speaker 7

Great, great.

Speaker 8

And I just wanted to comment on the drivers of that That would be just mix and just further pricing improvement?

Speaker 2

I think, again, as I commented in a previous question, I think Operating leverage will continue to give us a fall through as we continue to leverage the structure change we have done and digital operation in particular. The mix will be with long cycle and offshore will continue to be digital part of Technology adoption across the different basin will also passivity to the mix further. And finally, pricing will expand. So I think this is the combination that give us more confidence that we reach this mid cycle prior to previous anticipation.

Speaker 8

Great. Thanks a

Speaker 2

lot. Thank you.

Operator

Our next question is from Scott Gruber with Citigroup. Please go ahead.

Speaker 9

Yes, good morning.

Speaker 2

Good morning. Good morning.

Speaker 9

Good morning. So it's clear that your capital density It's going to be down versus last cycle. But just given the potential growth rates that we're seeing, Coupled with you and peers keeping a lid on CapEx, it appears that the market could be quite tight exiting this year. My question is, can you keep CapEx at a similar level to 2022 as a percent of sales into 2023 and into 20 20 20 For while still riding the multiyear growth cycle that well hope unfolds.

Speaker 3

So look, Scott, indeed our capital intensity has reduced quite a bit and quickly just because we High graded our portfolio. We extracted more operational efficiencies and we had our capital stewardship program as well where we deploy assets only The best returns, countries and contracts. So now for 2022, we are looking at spending total capital investments, including APS, Between 1.9% and 2%. That's just a relatively small increase compared to 2021. As to the can we keep this into the future?

Speaker 3

It's a bit too soon to say, but we definitely whatever increment we make, It's geared towards technology. It will be on the most accretive contracts. We want that incremental technology investment

Speaker 7

to be priced appropriately.

Speaker 3

And for that matter, investment to be priced appropriately. And for that matter, we already have a strong pipeline of contracts that allow us to do that at Favorable commercial conditions. So we'll see how the year progress. But for the moment, we are quite confident that the envelope we gave you Allow us to fully seize the growth in 2022 and prepare for 2023. We will see how we set the envelope in 2023.

Speaker 3

It cannot be a huge Increase, Porto.

Speaker 2

But we'll keep the capital intensity of our business going forward in check. I think the capital stewardship part of our returns for strategy is clearly giving us a little bit of a new dynamic and a new mindset in our commercial and contractual engagement with customer. And we have the whole organization focused on effectively and efficiently using the CapEx the coupon pool that we have To deploy to the most accretive contract and the most accretive engagement we have. So we will continue to use this discipline to make sure that we keep in check broadly the capital intensity in this cycle.

Speaker 9

Got it. And then of the $1,900,000,000 to $2,000,000,000 budget this year, are you able to state how much is APS? And if you do end up selling the Canadian project this year, how much could the EPS portion step down on an annualized basis?

Speaker 3

So, Luc, we don't disclose the split of the guidance. There is A small increase in EPS investment, but it's matched with increased cash flow. As you know, the way we look at EPS investment is really based On the cash flow of the individual projects and as an aside, we are generating very good cash flow within our APS projects. So, Overall, as Olivier mentioned, the business of APS, because it's just a handful of projects, is going to be pretty flat this year. And the investment level is definitely not going to increase in the future in future years.

Speaker 2

Got it. Appreciate all that. Thank you.

Speaker 5

Thank you.

Operator

Our next question is from Connor Lynagh with Morgan Stanley. Please go ahead.

Speaker 10

Yes, thanks. I was wondering if we could go back to pricing for a minute here. And I'm curious, if you could maybe characterize, It certainly sounds like pricing has become more broad based, but are there specific areas globally or specific divisions in which you're realizing And I guess the question is, when do we see this in the results? I mean, is this broad based and you're going to be seeing it in 2022? Or is this Sort of early signs and it's more of a 2023 dynamic.

Speaker 2

I think it's broad based, but let me maybe underline what Where and how we see pricing condition getting developed, I think and we see it in 3 ways. First, we believe that Passive condition and commercial favorable commercial term are linked to performance. So performance in execution, Our performance contracts are differentiated in the impact you provide customer, give us the opportunity to Negotiate favorable commercial terms and keep or expand our market position with key customers. So I think this As started, and this is depending on the region, this is something that impacts our service division, I would say, and our performance And the construction particularly. The second one is linked to, I think, Capacity, and I think capacity on unique technology, capacity on equipment that is tight, be it for offshore deployments or be it for high volume intensity basin like North America.

Speaker 2

So this, we have seen the conditional asset, and we are getting an opportunity to expand from green short to broad pricing improvement condition. So this we have seen happening for the last year in North America, and We see this starting to happen in offshore developments, where our unique equipment has to be mobilized, has to be secured, and they are done at pricing conditions that have improved over the last few months. Finally, inflation. Inflation is something that exists. It's related to market condition.

Speaker 2

Inflation is something that we always deal with. And today, we are seeing more into the OECD and North America, but We are dealing with inflation every day in every Azure unit, as we call it, over the years, and we know how to manage it to engage with our customer. It's more acute. It's more pronounced in South Palm and South Basin, and we're responding it with engagement of our customer and using the contract term we have to offset the inflation pressure we're getting. So it's all about performance, including our technology.

Speaker 2

It's all about Capacity tightening and it's about responding to the inflation pressure. So these three things are The level we are using and that are starting to be more broad, each of them across the different basins. Hence, it's progressive, And it's touching and addressing different basing and all divisions throughout 2022 and further into 2023.

Speaker 10

Thank you. That's all helpful context. The inflation topic obviously is one we haven't really talked about extensively. It hasn't seemed to prevent you guys from expanding margin significantly. But

Speaker 2

as we

Speaker 10

look into 2022, I'd say the market expectation seems to be that commodity deflation could occur, but Labor inflation could increase. I'm curious what you're seeing on that front and should we think about either of those having a meaningful impact on your margins either positively or negatively?

Speaker 2

I think first, I think as you mentioned, I think inflation is nothing new and it happened last year. And I think the performance of our Supply organization, the way we are dealing with it, I think has helped us to mitigate and shift to the right, if I may, some of these. And secondly, I think we have been able to engage commercially to offset and create net pricing condition. So I think we see this happening forward. And when it comes to resource versus equipment, I think resource is and is always a hot topic in our organization, but I think we'll respond to this by further improving accelerating our digital operation adoption, so that We offset some of the pressure on our resource as much as we can and can offset this pressure as well.

Speaker 2

So I think it's part of our toolbox that we use and that we'll continue to tune as the cycle unfolds.

Speaker 10

Great. Thanks very much.

Speaker 2

Thank you, Kunal.

Operator

Our next question is from Roger Read with Wells Fargo. Please go ahead.

Speaker 11

Yes. Thank you and good morning.

Speaker 2

Good morning, morning.

Speaker 11

Certainly good to see things turning around here. I just

Speaker 7

had a couple of questions to follow-up on some of

Speaker 11

the discussions about the expectations on EBITDA margins, the mix That you expect to see. And I was curious what you would anticipate or what is embedded in the forecast in terms of a recovery in E and A spending within the overall spending increase and if that's going to be less and the reason I say that as we know several companies have Essentially eliminated their E and A departments. How that might affect the EBITDA expansion that you anticipate

Speaker 2

No. I think it's a valid question, but I think if you were to notice some of the highlights that we have Released in the Q4, we had a rebound of E and A data exploration sales as part of the so the E and A is Albeit very compressed compared to the peak of the last cycle, I think he's seeing a resurgence for two reasons. First, Customer are trying to assess and reassess their reserve near around their hubs, be it on the land that they own, albeit on the key offshore hubs that they have developed to make sure they can fast track In filtering and develop near field exploration. So we see a lot of infrastructure led exploration, Not necessarily large greenfield, new, and we don't expect this to be the trend going forward. But we see that exploration is a much more geological exploration, if I may use that word, to be near field backyard exploration, as we call it, around near infrastructure, so that the operator, particularly offshore, get to accelerate the return on the existing And get a fast track fast short cycle return on the existing offshore.

Speaker 2

So we see that in Latin America, we see that in Perfomix grew in Europe. In West Africa, this is very broad. So we are benefiting from it In our relevant performance, we'll benefit from it in some of the key technology that we provide, including in digital. So I think While it has been a step down compared to previous cycle, there is a keen interest and investment resurgence in E and A for this reason. And I think we see that as a backup of FID and it's true partly offshore.

Speaker 11

I appreciate that. Thanks. And then, just looking at the Digital and Integration segment, it's obviously one lot of us are focused on and I know You've got a lot of expectations embedded in it as well. I was just curious if you look back over the last 12 months and forward over the next 12, What's been a positive surprise? What's been maybe a little bit of a headwind there?

Speaker 11

And if there's been a headwind, maybe how you would anticipate Ain't that reversing as we look into 2022 and 2023, probably more from the customer side, but if there's anything internal as well?

Speaker 2

No, in turn, I think we are very pleased with the progress of the deploying and continue to build the Digital foundation and digital platform foundation that support our strategy. Now every customer has their own pace of adoption, their own internal digital infrastructure they choose to deploy in which we need to plug. So our choice 2 years ago to go with Open Data Ecosystem Foundation, the choice we have made to go in partnership with different Cloud provider, different industry partner to expand our market reach has knocked some of these customer to come and join us In our digital journey with our platform, so it's we continue to work on it. The last 2 years Could have been better and larger adoption, possibly. But I think we have the foundation in place.

Speaker 2

We are in the early innings, As I said, of full adoption, considering the size, the oversized scale of our customer base. So I remain confident that this is just the first step and this will only accelerate. So We have the right foundation. So digital is here to stay. Digital transformation is here to accelerate across the industry.

Speaker 2

And I think We are taking it one customer at a time and this is what is happening. So we are positive.

Speaker 8

Great. Thank you.

Speaker 4

Thank you.

Operator

Our next question is from Neil Mehta with Goldman Sachs. Please go ahead.

Speaker 4

Good morning, team. Good

Speaker 3

morning, Dan.

Speaker 11

Good morning, Dan.

Speaker 4

Good morning. The first question is the modeling specific one. Working capital, obviously, a big Positive item this quarter. Can you talk about, do you see it unwinding over the course of the year and any just thoughts on trajectory there? And as it relates to that, Liberty, it looks like you sold $109,000,000 shares in the quarter.

Speaker 4

As it relates to that, Should we think of that as a ratable exit and as this run rate in the open market or are you going to be opportunistic around share price? Thank you.

Speaker 3

Thank you, Neil. So working capital indeed was significantly lower in the second half, especially Q4. And again, this was very strong customer collections and customer advances. So looking at 2022, we expect the Same pattern, there is seasonality in working capital. Usually, it increases in the Q1.

Speaker 3

We have payment of annual incentives to employees. And then, Gradually, it improves in the subsequent quarters, mostly on cash collection. So we'll see the same in 2022. There will likely be higher levels in general of working capital consumption as activity accelerates, particularly considering the Rates we are looking at, but we'll strive to maintain this to a minimum. And in any case, We still want to generate double digit free cash flow margins and that's inclusive of any working capital movement.

Speaker 3

So that helps us managing with this boundary. As to Liberty, yes, we are quite happy with our equity stake has actually improved quite a bit since The transaction was announced. We did decide to monetize part of the to start monetizing part of the investment following the expiration of the lockup period. We still hold a significant share of the equity, as I highlighted, about 31% after the transaction. So We'll continue to monitor the value of the investment going forward and we'll decide on further monetization based on market conditions.

Speaker 4

Thanks, Olivia. The follow-up is you announced a Capital Markets Day on this call earlier in the call, sometime in the second half. Can you just talk about what you want to achieve out of that day from a financial perspective? What type of framework? I

Speaker 2

think we are willing to reengage with all of you in the live session, 1st and foremost. We want to lay out clearly our strategic framework going forward in the cycle and beyond, including our 3 engine of growth: core, digital and new energy. And we will support it by laying out our financial framework for return including capital allocation and return to shareholder. That's what we aim at doing at that time, and we'll be clearly expressing in that setting the long term target that we set.

Speaker 4

Perfect. Looking forward to seeing you live.

Speaker 2

Indeed. Thank you. I believe we have time for one last question, operator.

Operator

Very good. That last question is from Keith MacKay with RBC Capital Markets. Please go ahead.

Speaker 4

Hi, good morning.

Speaker 2

Good morning, Kesh.

Speaker 4

Yes, I just wanted to maybe break ask you to dig into your North American outlook for the 20% increase in spending this year. Can you maybe just sort of break that out in terms of what you might expect for drilling versus completion Versus price inflation in general?

Speaker 2

Yes. Good question. I think first, I think the North America outlook we are providing is inclusive of offshore and onshore and onshore inclusive of U. S. And Canada.

Speaker 2

So I think it's a mix that is a bit Not difficult, but it's a lot of variable at play to decipher here. So but to your specific question, we foresee indeed that the U. S. Land, which is A big portion of this activity outlook will be having a bias towards well construction as the market is rotating from depleting the docks to Replenishing the DUCs, hence, well construction rig based activity is will be the lead in 20% Plus, and I think we are set to respond to this with our well construction portfolio In that environment, and this will be very favorable to us. On the offshore environment, it's broad.

Speaker 2

And I think our strong environment will be execution of well construction and also result performance. And so when you put all of this and you put a more modest and more moderate Canada environment, you have a mix that is favorable to our well construction and production system in U. S. Land and favorable to our reserve performance and well construction in offshore environment, all of which combined to give us this ambition about 20%.

Speaker 4

Perfect. Thanks And maybe one quick follow-up just on the Canadian APS. I know there was a sales process outstanding. Just curious if you can give any update on your

Speaker 3

So we have received several offers For EPS asset in Canada as part of the process we launched last year. So, while we were assessing those proposals, the market conditions continue to improve and the value of the asset increased as a result. So we actually took the decision that the offers we had received were not No longer reflective of the economic value and the cash flow potential of the asset. So, we are not entertaining those offers at the moment. The asset is now generating very strong cash flows, but we remain open to all options.

Speaker 4

Perfect. Thanks very much.

Speaker 2

Thank you. So I believe, William, we need to So before we close the call, I would like to leave you with few takeaways. Firstly, the quality of our results during the 4th quarter, Partially, the cash flow generation and our digital sales have helped us close a remarkable year with financial outperformance during 2021, supporting significant EBITDA margin expansion and very sizable reduction of our net debt. Credit to the entire Automation team for outstanding execution across all basins and divisions. Secondly, our performance strategic execution has resulted in significant progress in the adoption of our digital platform, The deployment of our fleet for basin and transition technology and the successful acceleration of our new energy venture, each developing towards a sizable addressable market.

Speaker 2

Thirdly, during 2021, we have enhanced our market position with key customers ahead of the significant upcycle and will fully benefit from the scale and breadth of the favorable activity mix unfolding across all basins during 2022 and beyond. This will result in significant growth and further margin expansion and will support our double digit free cash flow ambition. Finally, the macro environment is increasingly supportive of a potential super cycle. As this faber market condition extend both onshore and offshore well beyond 2022, we have increased confidence in reaching our mid cycle EBITDA margin ambition of 25% in the second half of twenty twenty three. Ladies and gentlemen, 2021 was a defining and transformative year for Schlumberger and 2022 presents the unique environment to substantially build upon our success and accelerate our growth into the future.

Speaker 2

Thank you very much.

Operator

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

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