Schlumberger Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 21, 2022

There are 14 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Schlumberger Earnings Conference Call. At this time, all participants are in a listen only mode. Later, there will be an opportunity for your questions. As a reminder, this conference is being recorded. I would now like to turn the conference over to the Vice President of Investor Relations, N.

Operator

D. Madhuamezia. Please go ahead.

Speaker 1

Thank you, Leah. Good morning, everyone, and welcome to the Schlumberger Limited Second Quarter 2022 Earnings Conference Call. Today's call is being hosted from Paris, following the Sluggish Elevator Board meeting held earlier this week. Joining us on the call are Olivier LePerche, Chief Executive Officer and Stephane DeGeuet, Chief Financial Officer. Before we begin, I would like to remind all participants Some of the statements we'll be making today are forward looking.

Speaker 1

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 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 Q2 press release, which is on our website. With that, I will turn the call over to Olivier.

Speaker 2

Thank you, Andy. Good day, ladies and gentlemen. Thank you for joining us on the call. In my prepared remarks today, I will cover 3 topics, starting with our Q2 results and our latest view of the macro environment. Thereafter, I will conclude with our outlook for the second half of the year and its compelling attributes, which are very supportive of our raised guidance for the full year.

Speaker 2

The Q2 was a defining moment in the overall trajectory of the year, with significant growth in revenue, margin expansion and earnings per share. Our execution was solid and directionally All trends were positively in our favor: strong international activity growth and steady drilling momentum in North America, Sustained offshore recovery and the broadening impact of improved pricing. We leverage the power of our core, our global footprint and differentiated technology to seize widening industry activity demonstrating our ability to capture growth in every land and offshore basin from North America to most remote international basin. This was reflected in the broad dimension of growth in our 2nd quarter results, as customers stepped up activity with a focus on increased performance and production. Above all, we effectively harnessed these positive dynamics and delivered very strong sequential quarterly revenue and earnings growth.

Speaker 2

In addition to the details provided in our earnings press release this morning, Let me reiterate some performance highlights from the quarter. We recorded a 14% revenue increase, the largest sequential revenue increase in more than a decade, as revenue growth exceeded rig count increase both internationally and in North America. Year on year revenue growth accelerated to 20%, further sustaining robust growth momentum with a visible inflection in international markets at 50% growth over same period last year. Growth was very broad across all dimensions: Area, divisions, land and offshore, with spending visibly higher across all customer types. Internationally, 2nd year growth was recorded in all of our Middle East and Asia units and all of Latin America.

Speaker 2

And in ECA, growth per pervasiv across Europe, Scandinavia and West Africa. In North America, we continue to post very solid growth offshore and on increased drilling and completions activity. The rise of offshore activity, particularly deepwater, While the key driver for our Q2 second growth is most regions and in support of all divisions. Globally, All four divisions posted double digit revenue growth and expanded margins sequentially, resulting in the highest quarterly operating margins level since 2015. In addition, another feature of the quarter was broadening pricing improvement, impacting all divisions, geographies and operating environment.

Speaker 2

Finally, the quarter also marked a number of new contract wins and an increase in backlog for Pollution Systems and our Rigequipment business, and are the leading indicator of the strength of the activity pipeline ahead of us. Notably, price improvement is also being reflected in production system backlog, which is significant for its later cycle implication for sustained margins expansion on an overall portfolio basis. To sum up, the Q2 emphasizes our clearly differentiated operational performance, strategic execution and financial results, both in North America and internationally. We have very strong momentum and have secured a solid pipeline of activity ahead of us. I'm very proud of the entire Schneeberg team for delivering these exceptional results and demonstrating our unique value proposition for both our customers and our shareholders.

Speaker 2

Turning now to the macro. 1st, energy security and urgency to establish more diverse and reliable Source of oil and gas supply have become increasingly apparent through the year, exacerbated by the effect of ongoing conflict in Ukraine and a notable increase in periodic supply disruptions in certain regions. 2nd, supply and excess spare capacity remained very tight as recent OPEC and IEA demand outlooks for 2022 and 2023 remain constructive, continuing to suggest a colon supply from North America and a more significant coal and supply from the international basins. 3rd, despite near term concern Of a global economic slowdown, the combination of energy security, favorable breakeven price and the urgency to grow long term oil and gas production capacity We'll continue to support strong upstream E and P spending growth. Consequently, we are witnessing a decoupling of upstream spending from potential near term demand volatility resulting in resilient global oil and gas activity growth in 2022 and beyond.

Speaker 2

Additionally, the factors supporting pricing tailwinds, more specifically the tightening service supply capacity both in NAM and increasingly in international markets, we'll continue to represent the defining characteristics of this upcycle and will support both revenue growth and margin expansion more than offsetting inflation. Looking more specifically at the second half of the year. We see very robust activity dynamics characterized by distinct acceleration of investments in the international basins and the continued strengthening of offshore activity as all operators including IOC step up spending. The energy security situation continues to drive structural activity increase resulting from the increased focus on short term production and the mid- to long term capacity expansion across oil and gas plays. In addition, We also expect further exploration appraisal activity and the pricing dynamics experienced so far to add further support to both the growth trajectory at the margins performance during the second half.

Speaker 2

This positive undercurrents will lead to an attractive mix and an increase in short and long cycle international projects complementing already robust short cycle activity in North America. Directionally, During the second half of the year, we expect a strong continuation of growth in the core, led by Production Systems through the rest of the year, with digital integration benefiting from typically seasonally strong year end sales. Also and as a result of the rotation of investment towards international basins, we anticipate a highest growth rate during the second half to occur internationally, setting up a very nice backdrop for 2023 outlook. Based on this, we expect our H2 revenue this year to grow at least high teens compared to the same period last year. Full year revenue growth will therefore be in the high teens, resulting revenue of at least $27,000,000,000 for 2022.

Speaker 2

Furthermore, our adjusted EBITDA in absolute dollar terms will increase by at least 25% for the full year of 2022 when compared to 2021. Indeed, 2022 is shaping up to be an outstanding year for St. Mary. The power of our core, our digital and decarbonization leadership and the expansive attribute of this upcycle enable us to leverage A focused North America business with an unparalleled international breadth. The combination of which favorably exposed Schlumberger to durable Top line growth, earnings and further margin expansion potential that is unmatched in the sector.

Speaker 2

Beyond this, the momentum we are building through the second half of the year and the exit rates that we'll have achieved bode very well for our 2023 outlook and financial ambition, both of which we will share in more details at our Investor Conference in November. I look forward to seeing many of you in person at this event. I will now turn the call over to Stephane.

Speaker 3

Thank you, Olivier, and good morning, ladies and gentlemen. 2nd quarter earnings per share, excluding charges and credits, was $0.50 This represents an increase of $0.16 sequentially and $0.20 when compared to the Q2 of last year. This also represented the highest quarterly earnings per share since the Q4 of 2015. In addition, during the Q1, we recorded a $0.14 gain relating to the further sale of a portion of our shares in Liberty Energy and a $0.03 gain relating to the sale of certain real estate, which brought our GAAP EPS to $0.67 Overall, Our 2nd quarter revenue of $6,800,000,000 increased 14% sequentially. This represented the strongest sequential quarterly growth since 2010.

Speaker 3

All four divisions experienced double digit increases. Changes in foreign currency exchange rates had virtually no impact on the sequential revenue increase. Pretax operating margins expanded 212 basis points sequentially to 17.1 percent and EBITDA margins increased 157 basis points to 22.6%. These increases largely reflect the seasonal rebound in activity, a favorable technology mix, particularly on higher offshore activities and strong exploration data licensing sales in our Digital and Integration division. Margins also increased significantly as compared to the Q2 of last year.

Speaker 3

Pretax segment operating margins increased 279 basis points year on year, while adjusted EBITDA margins increased 133 basis points year on year. This margin performance is even more notable considering the inflationary headwinds we continue to face. This demonstrates our ability to manage inflation through our supply chain organization as well as through pricing adjustments from our customers. Let me now go through the Q2 results for each division. 2nd quarter digital and integration revenue of €955,000,000 increased 11% sequentially, with margins increasing 570 basis points to 39.7%.

Speaker 3

These increases were primarily due to higher exploration data licensing sales, including $95,000,000 of transfer fees. Reservoir Performance revenue of $1,300,000,000 increased 10% sequentially beyond the impact of the seasonal rebound in activity driven by growth both on land and offshore. Margins improved 143 basis points to 14.6%, primarily as a result of the seasonal recovery and higher offshore and exploration activity. Well Construction revenue of $2,700,000,000 increased 12% driven by strong growth and improved pricing, both internationally and in North America. Margins increased 134 basis points to 17.5 percent due to the higher activity, combined with a favorable technology mix and improved pricing.

Speaker 3

Finally, Production Systems revenue of CAD1.9 billion increased 18% sequentially and margins increased 190 basis points to 9%. Global supply chain and logistics constraints started to abate, resulting in higher product deliveries and backlog conversion. International growth outpaced North America growth and was particularly strong in the Europe CIS Africa area. Now turning to our liquidity. During the quarter, we generated $408,000,000 of cash flow from operations and negative free cash flow of $119,000,000 Working capital consumed $936,000,000 of cash during the quarter, largely driven by higher receivables due to the significant revenue growth.

Speaker 3

However, our DSO improved sequentially. Inventory also increased as we continue to manage lead times in anticipation of continuous growth in the second half of the year, particularly in our Production Systems division. Consistent with our historical trends, We expect our working capital and cash flow generation to significantly improve over the second half of the year. During the quarter, we made capital investments of $527,000,000 This amount includes CapEx and investments in APS Projects and Seismic Exploration Data. Although it is reflected outside of free cash flow, Overall cash position was enhanced by the further sale of a portion of our shares in Liberty, We generated $430,000,000 of net proceeds.

Speaker 3

We currently hold a 12% interest in Liberty. During the quarter, we also sold certain real estate, which resulted in proceeds of $120,000,000 As a result, our net debt improved by €406,000,000,000 during the quarter to €11,000,000,000 This level of net debt represented a €2,000,000,000 improvement compared to the same period last year. Furthermore, we have now achieved our previously stated leverage target of 2 times net debt to EBITDA. We expect our leverage to continue decreasing throughout the rest of the year on a combination of higher earnings and improved free cash flow, allowing us to further strengthen our balance sheet. This will provide us with the financial flexibility required to continue funding growth and increase returns to shareholders throughout the cycle.

Speaker 3

I will now turn the conference call back to Olivier.

Speaker 2

Thank you, Stephane. Ladies and gentlemen, I believe we are opening the

Operator

Our first question goes to the line of James West with Evercore ISI. Please go ahead.

Speaker 4

Hey, good morning Olivier and Stephane.

Speaker 2

Good morning. Good morning, James.

Speaker 4

So Olivier, curious how you're thinking about the Evolution of the specifically the international cycle, as we go through the next several quarters and really into next year, I mean, we're clearly Your OSS or energy is decoupling from the global economy. You're going to see some changes in probably activity levels, the mix, The pricing, it seems to me that kind of the best is still to come I think for the cycle. So just kind of curious your broad outlook for international.

Speaker 2

No. First, I want to reinforce that the macro environment we are facing is quite unique. It's a conference on Unprecedented low spare capacity, 8 years of underinvestment in international basins And a call for Energy Security that is creating a double sourcing of both oil And gas, partially international basing. So when you put that together, it creates not only a short cycle impulse on Production enhancements to respond to that energy security would also reinforce the need for expanding oil capacity, accelerating gas development and entire set of international bases, both offshore and onshore benefit from it as we see. So we have seen an inflection in the sentiment of our customers, both national company, international oil company and International independent to respond to that call and turning and accelerating the investments and rotating the investments internationally visibly.

Speaker 2

So this is certainly a multi legs, I will call it multi phase, both Oil and Gas, positive environment forward. So we have seen that Latin America has been the first to benefit from that inflection and we see that continuing going forward as from Guyana to Brazil to Colombia and as a short cycle or to Argentina Shale Exposed Environment, we foresee this to be continuing, including exploration offshore Colombia, our Atlantic Margin Brazil. This is set to continue going forward. We are seeing this to rotate in ECA, as you may have seen, more than offsetting the constraints we have in Russia, Ukraine region and creating a superb undercurrent, as I call it, on all offshore basins in this region. And we have seen it in very strong in Europe, West Africa and Scandinavia with the unique tax incentive set That will start to be kicking in.

Speaker 2

Next year, we'll only accelerate. Natran and East Mediterranean or Black Sea will also see continuous growth going forward. So And you turn to Middle East and Asia. I think you have a combination of all capacity commitment increase For both UAE, Saudi and to a certain extent, Kuwait that will play out and will In the case of KSA, Krait, an uptick in offshore activity, partly from next year. You see that the gas that is being developed at large scale in Middle East, both for domestic and for fuel substitution That will continue to play to our strengths in Qatar and commercial in both UAE and Saudi, not Oman.

Speaker 2

And then you have the Asia market that is also not shy of investments and you see that long term into the South So I think it's multi branch, multi color, I would say, And it has started strong in Lam and it will turn to further ECA, further Middle East with inflection that will materialize as the quarter executed going forward.

Speaker 4

Okay, got it. Thanks. That's very helpful. Olivier, maybe a quick follow-up from me. You have your Digital event coming up here in September.

Speaker 4

I've been following kind of the list of speakers, very impressive group that you're assembling. And I'm curious where you see the industry now, where you see Schlumberger in the industry and The digitalization or the digital journey of the industry, it seems to be that we're we've been inflecting, but we seem to be inflecting even further in digital and certainly the results Or proving that out in your income statement as well. So curious about digital.

Speaker 2

No, I think you are correct. And I think The number and the rich panels that we are assembling into this digital forum in September It's there for two reasons. 1st and foremost is because the industry believes in digital that digital can add A significant step up in efficiency that will continue to impact positively cost, cash generation and will contribute to decarbonization of operations. So that's the reason why we are seeing customer Coming in high number and record number to our digital forum. And the second reason we have this success is on our full leadership and Platform strategy that has been adopted and that has been the cornerstone of our success in digital, and we are using it to continue to transition All of our customer base towards this cloud platform and this is a long tail and this will certainly last all this decade and beyond and we are looking forward to success a long success here.

Speaker 2

But also we are using this platform and its digital capability to continue Enhance our operation to contribute to transform our digital operation and to impact our customers and our own operation for efficiency and for performance. So lifting up through efficiency, lifting up the performance and hence getting a premium or getting an increment of market position. So it has a dual effect, But the success of Digital Forum is certainly the credit to our team, but also the proof that Digital is now mainstream into this industry.

Speaker 4

Got it. Thanks Olivier.

Operator

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

Speaker 5

Hey, good morning, Olivier. So going to crush your numbers, you grew in every region and every segment. But the one I thought was really interesting was MENA. It grew 7% this quarter, But it didn't even in the Middle East, it didn't even started yet. So I was wondering if you could just kind of start there and just help us give us a sense of kind of where you stand today in terms of project mobilization and how that region is building out.

Speaker 5

And I'm just kind of curious when do you fully expect to be up and running on the contracts you have in hand? And I guess related to that, it's been a while since we've seen a ramp up in activity over there, but we've also often seen startup delays and higher costs that lead up to the work. So Aside from just pure execution, are there ways that you can navigate some of these risks? Are there lessons learned from past cycles? Or is it different because this is much more integrated drilling work that didn't exist in prior cycles?

Speaker 2

No, I think I believe that our team Has improved its execution track record. We have, as you may remember, 3 years ago, We took some action onto our underperforming contract and we learned and applied some best practice, best lessons and project management to Technology deployment and to the discipline in our competency management deployment and use of digital to help us execute this contract in a better way. And from the way we manage the maintenance cycle of our equipment to the way we deploy and do remote operation to control and help and support our people on the ground. I think we have progressed a lot in the last few years. And as such, the major contract we are studying always Have a learning period, but I think we are accelerating this learning period by contrast to previous cycle.

Speaker 2

And I think we are Set for success on all these projects before soon. And but we always have somewhere somehow in international base in a major And but we expect this to be, I would say, the background that we'll have going forward. But our Execution tracker, lesson learned, use of digital, best practice and discipline organization, including our competency that we deploy, Has helped us to accelerate the lesson learned and to reach maturity in term of performance margins on those projects faster than So I'm positive. And as I said, there's an inflection building up in Middle East activity that will materialize in 2 or 3 countries visibly into the second half, and we'll accelerate next year as we will see more offshore Shallow activity, particularly into the GCC environment in Middle East led by the Saudi Oil, a major development that they're accelerating for oil capacity increase towards their 2027, 1,000,000 barrel. This will translate into activities, so further activity increase will materialize and we will benefit from it.

Speaker 2

The industry will certainly have A large ramp up going forward. So it's the early cycle of growth in Middle East.

Speaker 5

The offshore market was actually my second question there. The offshore markets are really tailor made for your technology profile, exploration, drilling, subsea boosting. So and recognizing what you That there's a ramp up on the shallow water side in the jackups in the Middle East. Is it too soon to say an overall kind of offshore inflection We noticed a lot of your awards were offshore Gulf of Mexico. It's not too soon.

Speaker 1

Okay.

Speaker 2

No, it's not too soon. In the Q2, international offshore was accretive to our growth internationally visibly. And you can see it into the ECA growth. And I think if you read some of the report published by EA and others, I think You see that the outlook for 2022 2025 on offshore investments and FID activity will outpace visibly the 2016 to 2019 cycle. So we have early innings of this offshore cycle, but it's quite interesting and It includes more exploration or more appraisal activity than we could have anticipated considering the some of the macro, But we are seeing it from Namibia to Colombia to Asia.

Speaker 2

We are seeing interesting exploration According to north of Brazil in the Atlantic margin, we are seeing acceleration of appraisal and exploration that combined and encased the Beneficiary mix, I would say, that we are seeing in the offshore environment. So yes, we are very well exposed. As we recently commented During the conference in June, we were we believe that average of the unit density that we collect from an offshore environment is from subsea to exploration, from data licensing to integrated rig well construction. So it's quite unique and We'll benefit increasingly on that offshore outlook.

Speaker 5

Excellent. Thank you very much.

Speaker 2

Thank you, Dave.

Operator

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

Speaker 6

Hey, good morning I guess, good afternoon over in Europe. I guess, I want to come back to the topic on international and maybe follow-up a little bit James' question. Obviously, we've now seen kind of 3 of the diversified service companies' international results. I mean, they've all surprised the upside. So it feels like that activity may be a little bit higher than kind of what we all thought, kind of heading into 2Q.

Speaker 6

But could you talk about the fundamental tightness that you're seeing across the international market, and whether you're seeing kind of broad based pricing at this point or is it just kind of more pockets of pricing increases? So just a little bit on pricing across the international side.

Speaker 2

No, it's definitively broadening as activity continue to ramp up and includes an offshore mix that typically As more pull on equipment considering the backup and considering the length of assignment of this equipment on the offshore rigs, this is creating a pinch on the supply capacity That results into a boarding passing pressure and passing uplift that we are seeing in all environment, I would say, both on existing contracts, where we have the opportunity to negotiate and offset more than offset inflation as in new tender and or in direct awards where customer want to secure Future capacity, they want to secure technology, they want to secure performance and as such are accepting and are directly negotiating Pricing increment on existing scope. So we are benefiting from this. The pricing environment is definitely broadening and improving. And we believe that going forward as we see the inflection of international investment that has started to accelerate in the second half, as we anticipate second half international Rate of growth will outpace the North America rate of growth. We see that to generate And more floor and are pleased for the pricing environment going forward.

Speaker 6

Yes. It makes sense and we agree with you there. Can we as a kind of a related follow-up, can you expand on kind of I guess maybe your ultimate earnings power of the company? Obviously, you gave us some EBITDA guidance here. And when we think about the earnings, for this year, you'll surpass last cycle's peak.

Speaker 6

But how should we be framing kind of the earnings power of Schlumberger this cycle? I mean, and then maybe just kind of weave in the discussion around EBITDA margins and your confidence in maybe hitting the 25% mid cycle margins, that you had kind of guided as a target for kind of year end 2023. Do you think you I'm trying to hit that a little bit earlier now given that you're outperforming on the margin side.

Speaker 2

No. I think as we have said before, I think there are 2, 3 reasons why we are About our margin trajectory earnings power going forward. The first is that we had a high Gallaudet portfolio in North America that has lifted our margin in North America to the level that we are comfortable now that we are competing and accretive. Secondly, we have created a significant reset in our operating leverage less than 2 years ago that is paying off and paying off at the time we are expanding and growing. And third, we believe that a combination of tight supply, already very visible in North America and broadening, as I said, in international, Combined with performance technology performance integration performance differentiation is creating a further premium That will fall through to earnings.

Speaker 2

So we have a favorable mix outlook that includes offshore. We have differentiated technology and integration performance, and we have the foundation, the operating reset That you have done and the high grading we did forward. So you combine this with the upside that digital brings to this and you get all in A significant upside that we have in our margin and we had anticipated 25% EBITDA margin sometime next year, and I think we are still very confident about that target.

Speaker 6

Okay, perfect. I'll turn it back over. Thanks, Olivier.

Speaker 3

Thank you.

Operator

Next, we have a question from Arun Jayarayam with JPMorgan. Please go ahead.

Speaker 7

Yes. Good morning, Olivier. Obviously, some concerns around Russia kind of heading into the print. But I was wondering if you could provide more color on the drivers of the 20% sequential type 1 grape that you saw in Europe CIS Africa That manifested despite a decline in Russian revenue.

Speaker 2

I think It's built on multiple geo units in West Africa and Europe and Scandinavia to a lesser extent That has been benefiting from project timing from particularly in the production system that you have seen As benefited from a significant sequential growth, a large portion of that was in Europe. The same in offshore environment, I think we have offshore demand is picking up in that region, and this has been very beneficial to us, including some explore into the performance. So you combine all of this and we have had a fairly substantial growth and we don't see this necessarily abating a lot in In the coming quarters, I think we see a lot of further offshore and activity both in Africa, Europe, Scandinavia accelerating, as I said, next year. And that will more than offset the risk we are facing in the Russia outlook.

Speaker 7

Great, great. And just my follow-up, Olivia, you mentioned how Schlumberger is hosting an Investor Day in November. I was wondering if you could talk about some of the objectives of that upcoming event and what do you hope to showcase and highlight to investors at that time?

Speaker 2

I think we commented on this during the last call. And I think it is An event where we invite investors and analysts to update them on our view first on the cycle, our strategy to execute on this cycle and our long term ambition we have for the company, building on our core and our digital and our new energy That will go forward. So that's where and you will see technology. You will see, I think, element of our strategy. And we will expose all of you to The view we have on the macro and the long term ambition for the company.

Speaker 7

Great. Thank you.

Speaker 2

Welcome.

Operator

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

Speaker 8

Yes. Good morning, team. The first question was just around good morning, Olivier. Just around your Canada APS assets. How are you thinking about that?

Speaker 8

Are you still considering the sale? Or has the thought process changed given the macro environment? And alongside that, The monetization of the Liberty position as well, should we be thinking that Schlumberger will look to continue to exit?

Speaker 3

Arun, it's Stephane here. So look, on Palisir in Canada, our asset for APS, We are quite happy with the performance of this asset. Actually, it's generating very strong cash flows. So it's a great asset, and we are making Most of it at the moment. As it relates to Liberty, you have seen that We decided to monetize a large part of our investment in the Q2 when the market conditions were favorable.

Speaker 3

So we now hold only 12% of the equity. We will simply we'll continue to monitor our investments going forward And we'll decide on further monetization based on market conditions like we did earlier.

Speaker 8

Okay. That's good. That's helpful color. Then the second is a philosophical question as Schlumberger is now getting to the point where the business is generating a decent amount of free cash flow and visibility for that cash flow to grow. How do you think about return of capital?

Speaker 8

And as you think about the preferred methodology to return that capital, Do you think a buyback or a dividend is the most effective way to get that cash back to shareholders?

Speaker 3

Sure. Look, first, as you know, we increased our dividend by 40% starting with the July payment. So This was the first step in increasing returns to shareholders in this growth cycle. Now as earnings and cash flows indeed Continue to grow over the cycle. We will review opportunities constantly to increase returns to shareholders and it will be either in the form of increased dividends or We will also see exceptional cash proceeds from our continuous portfolio high grading program.

Speaker 3

So This will give us further optionality. We will decide between dividends and share repurchases in due time. Dividend, of course, has to be Sustainable, affordable for the long term, but share repurchases will be part of the equation as well.

Speaker 8

Thank you,

Speaker 3

sir. Thank you. Thank you.

Operator

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

Speaker 2

Yes. Good afternoon.

Speaker 9

So as you mentioned, there's growing Session fears in the broader market and that's weighed on oil and to wait on your stock. But Olivia, as you mentioned, there seems to be great resiliency See here to the growth outlook. But I am curious, roughly at what oil price do you think The multiyear double digit recovery could be imperiled. It just seems like there's a Pretty big buffer between the current price and where that price could be, but I'm wondering if you could Wondering if you could. I think it's important.

Speaker 2

I think first, I think we are living through a supply led environment. I think it's quite unique, and it will take time before it Revers towards demand supply balance. So I think the quarters to come will be definitely quarters to be replenishing and securing enough spare capacity to avoid the exposure the overexposure to risk on the energy supply. But you have the undercurrent that is on energy security that is carrying and double sourcing. That is a new Attribute of demand that and supply sorry, and supply that is doubling down.

Speaker 2

So I think the buffer is pretty wide in my opinion and hence the short term and some of the risk On the slowing and or inflection into the demand growth going forward, there is a decoupling and there is resilience into the investment cycle that we are seeing as we speak. So whether this last, It's very difficult to say how long it will last, but I think we see that this cycle is stronger, longer and pricier than we had anticipated because of those unique condition that the secondary supply has just added a new dimension to it. So I think there is a lot of space in my opinion.

Speaker 9

Yes, we agree. And a follow-up on I know you touched on it and touched on it, it's benefiting mix. But I'm curious, just how you see The recovery here on the exploration side this cycle, the general assumption coming in was that exploration would lag. But just given a deep downturn in exploration activity and given renewed focus on energy security, should we now be assuming that exploration activity We'll actually rise in excess of the general recovery as it usually is. Is that possible here?

Speaker 2

No. What we are witnessing actually is that below the screen, if I may use that expression, is that we are seeing a lot of exploration And appraisal program that has been that are being initiated with some good surprise that we are seeing in the new frontier, call it, in Namibia, call it in Colombia or the place and we are seeing a program and support for new exploration In Asia as well. So yes, we are cautiously optimistic that indeed the exploration cycle is back. To scale, I think we'll be accretive to our mix and will giving us the unique exposure From our exploration data licensing and or from our reservoir performance portfolio and digital Also as we typically have a lot of license and digital solution that address the exploration geoscience workflows. So we see this as a mix that is accretive to our future and that is coming a little bit ahead of what we could have anticipated in this cycle.

Speaker 9

I appreciate that color. Thank you. Thank you.

Operator

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

Speaker 10

Yes. Thank you. Good morning and good afternoon.

Speaker 2

Good morning, Latoya. Yes.

Speaker 10

What I would like to maybe understand and focusing on kind of the back half and the exit this year on the EBITDA guidance, Didn't really raise that despite the stronger Q2, obviously, some positives on pricing. I was just wondering What you see to keep you I don't know if cautious is the right term, but let's just say conservative in terms of EBITDA guidance relative to revenue guidance. Is that Russia or something else that's flowing through?

Speaker 2

I think first, let me reiterate the guidance we provided. We provided a guidance that our revenue will be a full year of $27,000,000,000 at least and we provided a guidance that our EBITDA In dollar terms, we grew by at least 25% year on year towards from 2021. So if you use this, you see that it goes up Both the current consensus have been adjusted for the actual beat that we had in the Q2. So we foresee a raise In EBITDA dollar for the full year with this guidance that I just shared.

Speaker 10

Yes, I understand that. I guess I was just really coming at the sort of 24 the up 200 basis points from Q2 Q4 of 'twenty one to Q4 of 'twenty two.

Speaker 2

No, this is still Given the

Speaker 10

seasonal ambition and other things should help.

Speaker 2

Yes. This is still our ambition. And I think this ambition is based on the seasonal impact that we anticipate through particularly digital year end sales that will follow our digital forum. And the mix that we believe will be favorable. So we including international and offshore that are accelerating in the second half.

Speaker 2

So this is still the ambition we have set for the team and this is the reason why we have guided to the 25% Full year EBITDA growth in dollar terms or higher. Okay.

Speaker 10

And then This is a little more of a especially given the commentary earlier about best quarter since back in 2015. And this is a cycle where a lot of the E and P companies integrated into are being conservative in terms of their pace of spending increased relative to what we see in the commodity prices. I was just wondering, as you look at this cycle, this part of the recovery so far, what you could see in the back half of this year, thinking about next. What looks the same? What looks different?

Speaker 10

I mean, obviously, you expect the exploration recovery to continue. But if we just look at the, call it, development side, are we leaning more heavily into that? Is the mix more positive Then in some other cycles or should it ultimately look a lot like any other cycle, just it's going to be stronger in one place, weaker in another?

Speaker 2

No. I think what is quite a characterization of the cycle is The broader nature of this cycle, we see it. We are going across the 4 divisions. We are going across the 4 areas. And we are seeing this set to continue.

Speaker 2

So we see, as I said, a strong inflection in international that will outpace in terms of rate of growth, North America from the second half. We see also offshore, the return of offshore Being a characteristic that will only expand going forward. If you were to just look at the in terms of numbers, The number of jackup being operating in shallow waters is actually On power higher than it has been for the previous cycle at more than 300 and deepwater is starting to catch up. So I think we We have a mix of signal that are clearly broadening the activity outlook. Hence, if I want to differentiate, it's more the supply led and tightness of the market, creating pricing condition that is unique in this cycle, in addition to the broad nature of growth across Almost all countries in this in the coming quarters.

Speaker 10

Great. Appreciate it.

Speaker 2

Thank you. Yes. It's positive in all

Speaker 3

Yes, yes.

Speaker 2

It's positive in all dimension, I would say, customers, geographies and division business line. So that's what Pru foresee It's unique and it's brought its pollution enhancement, it's some appraisal acceleration and it's a development program both oil and gas. Thank you.

Operator

Next, we move on to Conor Lina with Morgan Stanley. Please

Speaker 11

Yes, thanks. We've been talking a lot about pricing, but I wanted to maybe just put a finer point on something. 1 of the big investor on both Schlumberger and the broader oil services industry is the degree to which you'll be able to extract pricing or Prove margins, not just in some of the less core geographies, but also with some of your big national oil company customers. So I'm curious based on how broad based your comments have suggested pricing is, are you already seeing pricing or margins improve In some of your biggest regions with some of your biggest customers, are your conversations indicating that more is to come? Just curious if you could No.

Speaker 2

As I commented before, it's broad. It's happening today and it's expanding. So now is it in For every contract, for every customer, that's what we are working on. But the customer understand, the customer realize, the Market is becoming extremely tight. The customer care for performance.

Speaker 2

The customer wants to secure capacity for their And hence, we are seeing success into our engagement with All of our customers into positive response and adjustment of our price in the existing contract or into new contract As I said, contract extension that are negotiated 1 on 1 and with passing increment or ends into tender environment where the pricing is being lifted. So it's broad and it will continue to happen. And I think while a year ago, it was mostly in North America with a green shot internationally. I would say it's very established in North America and it's broad now in international across all customers. And yes, Some will take more time to materialize and some will face at a later date, but we are confident that the momentum has started and the market will support it going forward.

Speaker 3

Got it.

Speaker 11

Thank you. Maybe pivoting a little bit here. We've tangentially about Russia, but I was wondering if you could just clarify what your expectations are for the country for your operations there and effectively what the wind down might look like relative to your plans to cease investment and new contracts there?

Speaker 2

I think I will just reiterate what we said earlier and bring a little bit of clarity, but our position is unchanged since we communicated earlier this year at the onset of this crisis. And we have suspended new investment in technology deployment into Russia. However, our structure give us the flexibility to have operation in country in full compliance with international sanctions. So at the same time, we continue to monitor the situation very, very closely, very carefully. I will always put the safety of our people and asset as a first priority.

Speaker 2

So we cannot and will not come up on the future, but we have taken a disposition to support.

Speaker 11

All right. Thank you very much.

Speaker 2

Thank you.

Operator

And ladies and gentlemen, we have time for one last question that is from Keith Mackey with RBC Capital Markets. Please go ahead.

Speaker 12

Hi, good day everyone.

Speaker 3

Hey, good morning. Good morning, Keith.

Speaker 12

Hi. Just would like To dig into a little bit more on the cash flow and free cash flow expectations for the second half of the year, Stephane, you mentioned that You expect that to improve. Just curious if you can put some color or magnitude around that and is a double digit free cash flow margin for the second half of the year in the cards.

Speaker 3

Sure, sure. So look, first, let me come back to the Q2 to put some color. Our free cash flow was indeed slightly negative even though the cash flow from operations improved sequentially. So As you have seen, it's all in the working capital. And to give a bit more details, 2 thirds of the sequential working capital increase It was due to an increase in receivables.

Speaker 3

But as I mentioned earlier, our DSO improved sequentially. So really the increase in receivables Due to the significantly higher activity we experienced in the quarter. Also the inventory is increased as I mentioned. We are preparing to fulfill Our growing backlog, particularly in our Production Systems division, we mentioned this is the fastest growing division. So we want to seize all the opportunities there.

Speaker 3

So really the working capital buildup we saw this quarter is to support the accelerated growth we are experiencing. As it relates to the rest of the year, We do expect the same pattern we see every year in the second half, where our working capital gradually improves on higher customer collections. Then we have lower inventories due to higher product sales towards the second half. So we fully expect our free cash flow to significantly improve in the second half as per historical trends. And clearly, we maintain our ambition to generate double digit free cash flow margin over the cycle for sure.

Speaker 12

Got it. Okay. Thanks for that. And maybe just a follow-up on capital. It looks like you moved to the top end of your $1,900,000,000 to $2,000,000,000 range.

Speaker 12

Can you talk about where this was? Is it activity driven versus inflation driven? And if it's ultimately where you think you'll land for the under your €27,000,000,000 revenue guidance.

Speaker 3

So just to confirm, we are expecting our Total capital investments, which include the CapEx, exploration, data cost and EPS investments for the full year, Approximately $2,000,000,000 As Olivier highlighted, clearly, we are seeing higher demand for technology and equipment, Mostly in our core service divisions, this is where the most of the CapEx goes, well construction and reservoir performance. We are recording very strong year on year growth. So this is expected to continue. So we will continue of course to maintain discipline in the way We deploy any additional resource allocating those to the countries and contracts with the best returns in accordance with our capital stewardship framework. So just one note, the CapEx portion of our total capital investment remains at the low end of our target range of 5% to 7% of revenue and we fully intend to maintain that commitment throughout the growth cycle.

Speaker 12

Perfect. Thank you very much for the color.

Speaker 3

Thank you.

Operator

And I do understand we have time for one more. That is Marc Bianchi with Cowen. Please go ahead.

Speaker 13

Hello. Thank you. I Wanted to ask first on Russia just to follow-up. I think last you updated Russia was about 5% of total company revenue, but at the time, the ruble had significantly devalued. We've seen an appreciation in the ruble since.

Speaker 13

Can you comment on where that revenue mix is today?

Speaker 3

Yes, Conor, Throughout the 1st 6 months of 2022 is actually is about 5% of our total worldwide revenue.

Speaker 13

Got it. Okay. Thank you, Stephan. As we look at the back half of the year, perhaps you could provide a little more color on the segments. I understand you mentioned D and I and production systems driving the improvement, but the D and I benefit would be largely 4th quarter, which is typical with seasonality, but there was an exceptional second quarter.

Speaker 13

So maybe you could just provide a little more color on the progression as we move through Q3 for the business.

Speaker 2

Yes, we had indeed a very strong quarter in DNI due to some very strong data expression sales. But at the same time, I think we will see indeed the DNI coming back to restoring its usual margin to low to mid-30s and to progress through the H2 to finish on a strong end of the year through the effect of digital yuan sales As we had experienced in previous years. So while it was very strong, I think it's still in the 30s and we expect To keep in the 30s, if not in the mid 30s going forward. So we will see the uptick in the end of the year.

Speaker 13

Very good. Thank you so much.

Speaker 2

Thank you, Mark. So, I think it's time Time to close indeed. Thank you. So ladies and gentlemen, to conclude, let me share with you 3 key takeaways. Firstly, as our Q2 results demonstrate, our differentiated global market position, our industry leading performance and our technology portfolio are uniquely matched to the market dynamics of this cycle.

Speaker 2

Secondly, the market fundamentals continue to Significant investment growth in our sector, we find anticipated decoupling and resilience against the uncertainty of the pace of future demand growth. At the same time, the market conditions are increasingly supportive of net pricing impact on to current and future contract, both in North America and internationally. Finally, our confidence in the activity mix outlook for the second half, particularly the rotation of investment internationally, combined with pricing tailwinds has led us to revise our full year expectation for both the revenue and earnings growth. This bodes extremely well for future beyond year end as we continue to secure significant service and equipment backlog to support our ambition in this upcycle. Ladies and gentlemen, I believe there is no better time for Schumacher as we continue to execute with much success our returns focused strategy and are set to continue to outperform in a market increasingly aligned with our strength.

Speaker 2

Thank you very much.

Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Schlumberger Q2 2022
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