SLB Q2 2023 Earnings Report

SLB EPS Results

• Actual EPS: $0.72
• Consensus EPS: $0.71
• Beat/Miss: Beat by +$0.01
• One Year Ago EPS: $0.50

SLB Revenue Results

• Actual Revenue: $8.10 billion
• Expected Revenue: $8.20 billion
• Beat/Miss: Missed by -$105.42 million
• YoY Revenue Growth: +19.60%

SLB Announcement Details

• Quarter: Q2 2023
• Date: 7/21/2023
• Time: Before Market Opens
• Conference Call Date: Friday, July 21, 2023
• Conference Call Time: 9:30AM ET

SLB (NYSE:SLB) (NYSE: SLB), historically known as Schlumberger, is a leading global provider of technology, integrated project management and information solutions for the energy industry. Founded by Conrad and Marcel Schlumberger in 1926, the company develops and supplies products and services used across the exploration, drilling, completion and production phases of oil and gas development. Its offerings are intended to help operators characterize reservoirs, drill and complete wells, optimize production and manage field operations throughout the asset lifecycle.

SLB’s product and service portfolio spans reservoir characterization and well testing, wireline and logging services, directional drilling and drilling tools, well construction and completion technologies, production systems, and subsea equipment. The company also emphasizes digital solutions and data analytics for subsurface and production optimization, providing software platforms and engineering consulting to support decision making and operational efficiency. SLB combines equipment, software and field expertise to deliver integrated projects and field development programs for national oil companies, international majors and independent operators.

SLB operates on a global scale, serving customers in more than 100 countries and participating in projects across the major hydrocarbon basins. The company is publicly listed on the New York Stock Exchange under the ticker SLB and is led at the executive level by Chief Executive Officer Olivier Le Peuch. SLB’s long history in domain-specific technologies and continued investment in digital and engineering capabilities position it as a prominent service provider to the broader energy industry.

SLB Q2 2023 Earnings Call Transcript

Key Takeaways

• Q2 financial strength: SLB posted $8.1 billion in revenue—up 5% sequentially and over 20% year-on-year—led by international markets (+21%) and generated nearly $1 billion in free cash flow.
• Robust international/offshore upcycle: Global final investment decisions are expected to exceed $500 billion from 2022-2025 (including $200 billion deepwater), while Saudi Arabia plans ~$100 billion in upstream capex over the next three years.
• Digital leadership: The Delphi cloud platform grew users 60% year-on-year to 5,400, with enterprise-wide deployments at Petrobras and INAP, alongside 1,400+ edge-connected assets and over 100 AI solutions commercialized.
• Margin expansion & outlook: Global operating margins rose over 50 basis points sequentially to a 24.2% adjusted EBITDA margin; the company reaffirmed full-year targets of >15% revenue growth and mid-20s EBITDA growth, with net debt down $200 million quarter-on-quarter.
• Capital discipline & shareholder returns: SLB expects second-half free cash flow to exceed the first half, maintains $2.5–2.6 billion capex guidance for 2023, repurchased 4.5 million shares for $213 million in Q2, and is committed to $2 billion in dividends and buybacks.

Presentation

[Operator]

Ladies and gentlemen thank you very much for standing by, and welcome to the SLB earnings conference call. At this time, all participant lines are in a listen-only mode. Later, there will be an opportunity for your questions. You may press one then zero to place your line into the question queue. You may remove yourself from queue by repeating the same one zero command. As a reminder, this conference is being recorded. I would now like to turn the conference over to the SVP of Investor Relations and Industry Affairs James McDonald. Please go ahead.

[James McDonald, SVP of Investor Relations and Industry Affairs at SLB]

Thank you, Leah. Good morning, and welcome to the SLB Q2 2023 earnings conference call. Today's call is being hosted from Paris, France, following our board meeting held earlier this week. Joining us on the call are Olivier Le Peuch, Chief Executive Officer, and Stephane Biguet, Chief Financial Officer. Before we begin, I would like to remind all participants that some of the statements we will be making today are forward-looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. I therefore refer you to our latest ten K 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.

[Olivier Le Peuch, CEO at SLB]

Thank you, James. Ladies and gentlemen, thank you for joining us on the call today. In my prepared remarks, I will cover three topics. I will first review a few of our financial highlights from the quarter. Next, I will discuss the positive momentum we are seeing in the international and offshore markets. Third, I will share the exciting progress we're making in digital before concluding with our outlook for the Q3 and the full year. Stephane will then provide more details on our financial results, and we will open for your questions. Our Q2 results continue to demonstrate the strength of our portfolio and our strategic positioning in the most attractive, accretive, and resilient market globally. This is translating to financial performance. We closed the H1 of the year with steady growth across revenue, earnings per share, free cash flow, and expanded EBITDA and pre-tax segment operating margins. International revenue continued its strong growth momentum, increasing 21% year-on-year as we captured broad growth across all divisions and geographic areas. Q2 revenue increased by more than 20% year-on-year in 14 of our 25 international units. Most notably, Saudi Arabia, UAE, Mexico, Guyana, Brazil, Angola, Caspian, and India all grew more than 30% over this period. This drove our highest year-on-year international incremental operating margin over the last three years. It underscores the breadth of our portfolio that I continue to emphasize. SLB growth SLB global reach shields us from regional fluctuation, as we have recently seen in North America, and give us the ability to seize opportunities wherever they arise. This is a true differentiator for our business and positions us for long-term outperformance. Following the remarks I shared in our earnings release this morning, I would like to reflect on a few notable highlights from the quarter. The bold growth characterizing this upcycle continues internationally. This was pervasive, and we are very pleased to see all divisions and geographic grow revenue and expand margins sequentially. In North America, we continued to increase our revenue, highlighting our agility across the land markets and the expanded activity in the U.S. Gulf of Mexico, solidly outperforming the rig count. Our focus on the quality of our revenue continues to support our margins. Sequentially, we expanded our pre-tax segment operating margins.

[Olivier Le Peuch, CEO at SLB]

This was fueled by our strong international reporting leverage, increased technology adoption, and positive pricing trends that stem from inflation-driven contract adjustments and tight service capacity. With higher earnings and improved working capital, our sequential cash flow from operation grew considerably, and we generated free cash flow of nearly $1 billion during the quarter. I want to thank the entire SLB team for their hard work and exceptional performance, delivering value for our customers and our shareholders throughout the quarter. Let me take a moment to touch on the macro environment. As we have projected for the past few quarters, the international and offshore markets continue to exhibit strong growth as North America has moderated. This is playing to the strengths of our business, as international revenue represents nearly 80% of our global portfolio, and offshore comprises nearly half of that. As the growth rate shifts further toward international, these market conditions are driving the breadth, resilience, and durability of this upcycle and creating new opportunities for our business. Let me describe where this is taking place. In the international markets, the investment momentum of the past few years is accelerating. This is supported by resilient long cycle developments in Guyana, Brazil, Norway, and Turkey, production capacity expansion in the Middle East, notably in Saudi Arabia, UAE, and Qatar, the return of exploration appraisal across Africa and the Eastern Mediterranean, and the recognition of gas as a critical fuel source for energy security and the energy transition. In the Middle East, this is resulting in record levels of upstream investment.

[Olivier Le Peuch, CEO at SLB]

From 2023-2025, Saudi Arabia is expected to allocate nearly $100 billion to upstream oil and gas capital expenditure, a 60% increase compared to the previous 3 years, as they invest to attain a maximum sustained production capacity of 13 million barrels per day by 2027. Several other country in the region have also announced matured increases in capital expenditure that extend beyond 2025. Furthermore, we continue to witness a broad resurgence in offshore, driven by energy security and regionalization. Operators all over the world are making large-scale commitments to ascend discovery, accelerate development times, and increase the productivity of their assets. This is resulting in increased in-field and tieback activity in metro basins, new development projects, both in oil and gas, and support for new exploration. With this backdrop, we anticipate more than $500 billion in global FID between 2022 and 2025, with more than $200 billion attributable to deepwater. This reflects an increase of nearly 90% when compared to 2016, 2019. These FID investments are global, taking place in more than 30 countries, we are seeing the results with new projects in offshore basins across the world. This is reflected in the many contract awards highlighted in the earnings press release, notably in Mexico, Brazil, and Turkey. These contracts, in addition to many others, are building a strong foundation of activity outlook, decoupled from short-term community price volatility. Moving forward, we expect further growth to be led by accelerating activity in well construction, new opportunities for reservoir performance in exploration appraisal, expansion for production systems in subsea, digital will enhance it all.

[Olivier Le Peuch, CEO at SLB]

In our business and the industry as a whole, the increased adoption and integration of digital technologies remains one of the most significant opportunity for growth. Indeed, our industry generates massive amounts of data, and by capturing that information and turning it into trusted and actionable insights, we can make energy production more accessible, more affordable, and more sustainable. This is a critical moment for our industry. There are three digital trends concurrently shaping its future, clearly setting the path for a higher value, lower carbon outlook. First, the adoption of cloud computing at scale. For geoscience workflows, this is supporting significant productivity gains for geoscientists and engineers across asset development teams. This is happening at a time when our industry is compelled to accelerate the development cycle and de-risk both subsurface and surface uncertainties. We continue to benefit from this trend in the adoption of our Delfi cloud-based digital platform, delivered through a flexible and personalized Software as a Service, SaaS, subscription model. With the cumulative number of users in global customer organization growing 60% year-over-year to 5,400. As we shared in our earnings press release, Petrobras and ENAP are only just two example of customers deploying Delfi enterprise-wide, with the aim of fundamentally changing how they work across the E&P value chain. Second, our industry is unlocking the power of data at scale. A single well can produce more than 10 TB of data per day, and this doesn't even begin to touch on the total amount of upstream data across exploration, development, and production workflows. The adoption of open data platform across the industry is liberating data for artificial intelligence, AI, applications at large, at scale. SLB is benefiting from and driving this trend through both data foundation and AI deployment. We are seeing early success with the commercialization of our enterprise data solution, powered by Microsoft Energy Data Services. This offering delivers the most comprehensive capabilities for subsurface data, in alignment with the emerging requirements of the OSDU Technical Standard. We are witnessing tremendous success with our Innovation Factori, where we have developed more than 100 AI solutions with more than 80 customers since 2021. All of them with rich domain content in addition to generic AI capabilities. Third, digital operations are gaining in maturity, transforming the way operators develop and utilize assets, from automation to autonomous operation across both well construction and production. We are clearly seeing an inflection in the deployment of digital operation, with significant impacts on efficiency, carbon footprint, and performance.

[Olivier Le Peuch, CEO at SLB]

Today, customers are accelerating the adoption of our Neuro autonomous solutions, with Kuwait Oil Company and PETRONAS both using these technologies to reduce manual operations while increasing performance, enabling drilling consistency and rig time savings. Similarly, our partnership with Cognite as a platform for unlocking access to production operations is gaining momentum in the industry, as exemplified with the Cairn contract highlighted in our earnings release. We continue to deploy Delfi Edge Agora technology to deliver real-time insights directly within operation from connected hardware, where data is generated and processed with AI at the edge. We currently have more than 1,400 connected assets deployed, doubling year-on-year. SLB is positioned to fully harness this positive market condition, as well as our technology and digital leadership to drive financial outperformance and margin expansion. We are progressing in our journey to double the size of our digital business between 2021 and 2025, and the trend I have just discussed are reinforcing our confidence in the outcome of our strategy execution. I will next describe how we see the rest of the year progressing. After a positive H1, we remain confident in our full year financial ambitions and our visibility into a significant base load of activity that reinforces our 2023 full year forecast and our growth ambition beyond. We continue to expect year-on-year revenue growth of more than 15% and adjusted EBITDA growth in the mid-20s. Turning specifically to the Q3, we expect revenue to grow by mid-single digits in the international markets, with all international geographical area growing sequentially, led by the Middle East and Asia. In contrast, North America revenue will be slightly down. With our focus on the quality of revenue, harnessing operating leverage, and further technology adoption, we expect global operating margins to further expand by more than 50 basis points sequentially. This will result into the highest EBITDA margin we have seen in this cycle. I will now turn the call over to Stephane.

[Stephane Biguet, EVP and CFO at SLB]

Thank you, Olivier, and good morning, ladies and gentlemen. Q2 earnings per share, excluding charges and credits, was $0.72. This represents an increase of $0.09 sequentially, and $0.22, or 44%, when compared to the Q2 of last year. We did not record any charges or credits during the current quarter. Overall, our Q2 revenue of $8.1 billion increased 5% sequentially, mostly driven by the international markets, led by the Middle East and Asia. Sequentially, our pre-tax segment operating margins increased 154 basis points due to the high-quality international revenue, which resulted in strong incremental margins. This performance highlights the underlying earnings potential of our international business with new technology and high service intensity, particularly offshore, accelerating margin expansion. Company-wide adjusted EBITDA margin for the Q2 was 24.2%.

[Stephane Biguet, EVP and CFO at SLB]

In absolute dollars, adjusted EBITDA increased 28% year-on-year. As a reminder, our ambition is for adjusted EBITDA to grow in percentage terms in the mid-twenties for the full year of 2023. On a year-to-date basis, adjusted EBITDA has grown 35%. We are on track to achieve this goal. Q2 revenue increased 20% year-on-year, as international revenue was up 21%, significantly outpacing North America revenue growth of 14%. The strong international growth was led by the Middle East and Asia, and robust offshore activity. Pre-tax segment operating margins expanded 240 basis points year-on-year, with significant margin growth in our core divisions. Let me now go through the Q2 results for each division. Q2 Digital & Integration revenue of $947 million increased 6% sequentially, with margins increasing 4 percentage points to 34%. The sequential revenue growth and margin expansion were primarily driven by higher digital sales following the seasonal low of the Q1. Year-on-year, digital and integration revenue decreased 1%, and margins declined 6 percentage points due to the absence of exceptional exploration data transfer fees we recorded in the Q2 of last year. Growth in other digital products and services was strong, however, including a more than 60% year-on-year revenue increase in our cloud and edge solutions. Reservoir performance revenue of $1.6 billion increased 9% sequentially, while margins improved 248 basis points to 18.6%. These increases were primarily due to strong growth internationally, led by the Middle East and Asia. Year-on-year, revenue grew 23%, and margins increased 396 basis points, driven by strong growth internationally, both on land and offshore.

[Stephane Biguet, EVP and CFO at SLB]

Well construction revenue of $3.4 billion increased 3% sequentially, while margins of 21.8% increased 115 basis points, driven by strong measurements, fluids, and equipment sales activity, as well as pricing improvements internationally. Year-on-year, revenue grew 25%, while margins expanded 424 basis points with very strong growth across all geographical areas on higher activity and improved pricing. Finally, production systems revenue of $2.3 billion increased 5% sequentially, and margins expanded 274 basis points to 12%, representing the highest margin since the formation of the division. The sequential revenue growth was led by the Middle East and Asia, partially offset by the absence of significant project milestones we reached last quarter in Europe and Africa. Year-on-year, revenue increased 22%, while margins expanded 300 basis points, driven by higher sales of completions and surface production systems, and the easing of supply chain and logistic constraints. Turning to our liquidity. During the quarter, we generated $1.6 billion of cash flow from operations and free cash flow of $986 million. This represents a $1.25 billion increase in free cash flow over the same quarter of last year, which is largely due to improved working capital. We expect this performance to continue throughout the rest of the year. Our free cash flow in the H2 of the year will be materially higher than the H1. Our net debt reduced approximately $200 million sequentially to $10.1 billion, which is $900 million lower than the same period last year. Capital investments, inclusive of CapEx and investments in APS projects and exploration data, were $622 million in the Q2. Over full year, we are still expecting capital investments to be approximately $2.5 billion-$2.6 billion. We continued our stock buyback program and repurchased 4.5 million shares during the quarter for a total purchase price of $213 million. We continue to target to return $2 billion to our shareholders this year between dividends and stock buybacks. I will now turn the conference call back to Olivier.

[Olivier Le Peuch, CEO at SLB]

Thank you, Stephane. Ladies and gentlemen, I believe we are ready to open the floor to your questions.

[Operator]

Thank you. Ladies and gentlemen, once again, if you would like to ask a question you may press one then zero on your telephone keypad. Our first question will come from line of James West with Evercore ISI. Please go ahead.

[James West, Senior Managing Director at Evercore ISI]

Hey, good morning.

[Olivier Le Peuch, CEO at SLB]

Morning, James.

[James West, Senior Managing Director at Evercore ISI]

Olivier, Stephane.

[Olivier Le Peuch, CEO at SLB]

Morning.

[James West, Senior Managing Director at Evercore ISI]

Olivier we've especially you and I and Stephane have spent a lot of time together in the last you know 18 months. Let's if we go back to you know Luzern and then to the Analyst Day in New York city and recent, you know events we've become increasingly, I think all three of us, bullish on the cycle and the cycle's duration, especially. And I wonder if you could comment on the duration aspect you see now as you know, travel around the world, you meet with your customers, you're talking to your customers, you know, what are they saying about their drilling programs over the next several years? You obviously made some pretty bullish comments around Saudi, but you know more broadly you know with your major customers, what are their expectations and how are they thinking about duration of their, you know, upstream spending cycle?

[Olivier Le Peuch, CEO at SLB]

No, very good question, James. I think you may have realized that recently we characterized the cycle as breadth, resilience, and durability. Let me comment a little bit further on durability, and there are two or three elements to this. I think, obviously, we did comment on the return of offshore. We were the first to flag it and to call for the return of offshore and I think we have seen this international offshore resurgence materializing in the last 12 months and accelerating. In the H2 actually.

[James West, Senior Managing Director at Evercore ISI]

Right

[Olivier Le Peuch, CEO at SLB]

The offshore rig count will be higher than the land rig count increase. This momentum is driven by the economics of offshore assets, where the FID now, the vast majority of FID are below $50, hence favorably positioned for FID. Also, the geologic and the low carbon nature of most of the assets, accessibility to this resource, and is both oil and gas. Offshore is having a resurgence that is translating into a very significant pipeline of FID, and we see it across not only the IOCs and independents that are capturing this opportunity, but also the NOC that have placed a bet on offshore, as you can see from Brazil to Middle East or the North Sea. We see this happening at scale. We see also the emergence of a second leg of FID and future offshore expansion driven by exploration appraisal. Exploration appraisal is happening in many country. There are many rounds of licensing rounds happening, a lot of exploration and appraisal is happening to find this next reserve and develop. Offshore is there to stay, and not only in 2024, 2025, but beyond, as we can see, and with the second leg materializing. Beyond that, obviously, Middle East has made a significant commitment of capacity expansion, both in oil of four million barrels or so, and in gas for regional consumption, displacing oil for energy or for generating some blue ammonia or blue hydrogen products, as well as further expanding their energy export in Qatar, particularly. The Middle East capacity expansion is leading to, as we have been quoting, record level of investment from this year onward, and is not set to again stop in 2024, as the vast majority of this capacity expansion are towards the H2 of the decade, 2027 or 2030 for some of the target. What we have seen lately, and the feedback through the visits we have had, is that the duration of the cycle as we were characterizing a year ago, is actually extending and is, to be believed, prolonging to the right, and with combination of offshore resurgence being very solid and Middle East being capacity expansion beyond the next three years.

[James West, Senior Managing Director at Evercore ISI]

Okay. Okay, that makes a lot of sense. Then the maybe a follow-up as we think about, or as you think about I guess, revenue quality, as we go through this what looks to be and appears to be and I think we agree on a long duration cycle you can upgrade your revenue quality either by you know you know choosing offshore or onshore or customers by customer. How are you thinking about that quality of the revenue base that you're putting in place now? What are the main kind of drivers of that? I'm assuming it's you're looking for the highest return and highest margin, but what are the key metrics or key assumptions you have there?

[Olivier Le Peuch, CEO at SLB]

No, absolutely. I think we have been initiating the returns focused strategy a few years back.

[James West, Senior Managing Director at Evercore ISI]

Sure

[Olivier Le Peuch, CEO at SLB]

We are getting the characteristic of the cycle that's favoring and accelerating our strategy as we get the opportunity to not only get a favorable mix that include a bit more offshore Middle East expression appraisal, but also higher technology adoption, including digital, including fit technology, or including transition technology, all combining to give a premium to the and a higher revenue quality. I will not I will not forget also the capital discipline that we have initiated as part of this strategy, that is pushing us to high guide to the higher returns, higher margins, contract as we move forward, and make sure that we get the best return for the capital we deployed, and also to put a clear threshold on capital investment and capital strategy going forward. The combination, as I said, of the favorable mix, the technology adoption at scale with some secular trends in digital, and the capital discipline that we have used to execute our strategy, are allowing us to create the revenue quality improvement and the high grading on every portfolio and every business line we have to drive a margin expansion. We have seen margin expansion increasing, and we will continue to foster this as we move forward.

[James West, Senior Managing Director at Evercore ISI]

Thanks so much, Olivier.

[Olivier Le Peuch, CEO at SLB]

Thank you, James.

[Operator]

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

[David Anderson, Director and Senior Equity Research Analyst at Barclays]

Great, thank you. Good morning, Olivier. How are you?

[Olivier Le Peuch, CEO at SLB]

Morning, Dave.

[David Anderson, Director and Senior Equity Research Analyst at Barclays]

I was curious on the Middle East Asia showed really impressive sequential growth during the quarter. I was wondering if you could talk a bit about what drove that? Was that just a reflection of the steady ramp up of projects in Saudi and other Middle East markets? Also if you mentioned a directional drilling contract in the release. Was that a discrete contract and are you starting to see higher pricing on those types of contracts now?

[Olivier Le Peuch, CEO at SLB]

Well, I think to be, to stay at a very broad term, I think it's Middle East and Asia. There are several geo units, as we call them, that have been benefiting from very significant growth, sequential and year-on-year. As we commented, many of them are in the 30% basket, more than 30% basket growth year-on-year in that region, that area across. Indeed, in the GCC and the Middle East particularly, we are benefiting, again, we say from three things. We are benefiting from the capacity expansion program that have been initiated, that have turned into an inflection into reactivity and spend activity that you benefit from considering our market exposure. We have been renewing several contracts and either encroaching or gaining market and strengthening our market position. You have seen several announcements made, and this includes service capacity, service expansion contract more than I would say integrated contract. Finally, we have been benefiting from based on our performance, from I would say pricing increment based on performance that have all combined service contract expansion, reactivity increase, and pricing, all combining to result into an incremental revenue year-on-year and sequentially, that we believe will be on the continuum for the rest of the year.

[David Anderson, Director and Senior Equity Research Analyst at Barclays]

Okay, thank you. If I could shift over to the D&I segment. Could you provide some color on the non-APS businesses and how they've been trending? I'm particularly interested in the digital solutions business, and kind of really what you're seeing in terms of digital adoption of your customers. I'm not sure if you can provide any metrics or any examples but just curious how some of your customers are using it this year versus a year ago. Like is there any way to show us or explain to us how that digital adoption is trending?

[Olivier Le Peuch, CEO at SLB]

Yeah, I think, as we keep saying, I think some of the digital success and digital business growth we are having today is a bit masked in our financial reporting results by the flat or declining APS year-on-year that we have. I think you have to look at it first on the financial overall result of this division. Secondly, I will say that as I described in my prepared remarks, that there are three trends that we are capturing and that we are exposed to, that are happening in industry, all of them under a secular trend of digital transformation in this industry. One on cloud computing making the best out of cloud computing, scalable computing, and elastic computing access that a cloud solution such as Delfi gives, and hence accelerating productivity of the asset team from exploration to asset development. We are seeing it. You have seen the announcement of the Petrobras award. That is a square into that category of using cloud capability to accelerate and enable productivity in the geoscience team and quality of results for the asset development team. That's one sector that. Again, we measure it by either number of customers expansion or adoption of users, which we have seen, I quoted in my prepared remark, at 60% growth year-on-year.

[Olivier Le Peuch, CEO at SLB]

The second aspect is unlocking data, the vast amount of data that our industry manipulates, stores, manage, and structured data, unstructured data, to try to unlock this and democratize if you like AI. We are fortunate to have a cloud-based solution, Delfi, that has AI domain capability embedded into it and we use it every day to help our customer unlock and get access to this AI capability. We have done up to Innovation Factori, 100 solutions deployed. That's the second engine of digital growth if you like is the data structure data transformation and AI capability. That's again, we are speaking about growing at above 50% for that sub-segment of our digital offering. and maybe the one that has the most growth potential, that is untapped across the industry, is digital operation. That's everywhere from Well Construction to producing assets. That's why we deploy either some element of our cloud offering in drilling automation or in surveillance of assets, or we deploy at the edge, on the asset, at the pump, some device and we call it the Agora Edge solution which have embedded AI at the edge, that do not need to round trip to the cloud to optimize these assets. We use it and consume it in our APS asset to enhance the performance. We are seeing the benefit of all these at the same time. They're all growing at a different pace different adoption across the NOC, the independent, all the IOCs. It will be a long tail of growth that will clearly have a long durability and will continue to be a factor of secular trend in our industry to extract efficiency, low carbon, productivity, using this trend. That's what we see. Multiple, multiple engine of growth across multiple horizon, and with different technology where we have leadership on most, and a footprint that allows us to tap into 1,500 customers for the long run.

[Operator]

We will move on to line of [crosstalk]

[Olivier Le Peuch, CEO at SLB]

Dave?

[Operator]

Go ahead, Mr. Gruber. We will go ahead and move on to the line of Arun Jayaram with J.P. Morgan Chase. Please go ahead.

[Arun Jayaram, Analyst at JPMorgan]

Yeah, good morning, Olivier. My first question is on offshore. You've highlighted how 85% of global offshore FIDs are now underpinned by oil prices at $50 or below which is quite a bit below what we saw in the prior cycle where we thought that you needed call it mid-60s oil price to kinda justify you know offshore developments particularly deep water. I was wondering if you could give some thoughts on what is driving call it the lower break-evens than we saw prior cycle?

[Olivier Le Peuch, CEO at SLB]

I would think, there are several aspects to that. One, obviously, is, the progress the industry at large has made in efficiency, integration, technology, performance at large. That is, getting the curve shifting to the left on drilling, the cycle compressing on subsea and the overall development cycle to be more de-risked to digital. Technology integration performance at large has helped the operator and the service industry to deliver faster and to deliver at a lower total cost, the development of those assets. The second element I would think is that exploration has been creating a portfolio of assets that can then been high-graded, and then the quality of the resource, the high quality of the geological play and lower carbon, and better plays that have a better production and recovery potential, have also emerged and have been more favorably primed and, or, we say, prioritized by our customers. These customers have choice, and they focus on the best and the most advantageous assets and the most advantageous geological basins. We have seen it, from Brazil to Guyana, and we are seeing it in the Middle East for some of the gas asset as well. The third, I think dimension that is I think accelerating in my opinion. is what is called infrastructure-led development or infrastructure-led exploration and development, which make the returns on incremental oil, incremental gas from existing hubs, from existing platform, a lower cost than in the past because the capability to infill, tie back, and expand from an existing platform, getting a better return on existing infrastructure. Hence, we have seen a significant improvement and significant increase on investment into this infill and tieback and ILX as it is called infrastructure-led development, infrastructure-led exploration. That's these are this is another trend that is lowering the average cost of FID for incremental oil pool or additional gas. You combine all of this, and you are getting better economics and a better and sustained and higher durability for the long-term offshore play.

[Arun Jayaram, Analyst at JPMorgan]

Great. Thanks for that. Just to follow up, Olivier, we've been getting a few buy-side questions on the update on your website regarding Russia. I'm wondering if you could just expand on what this means on a go-forward basis for SLB?

[Olivier Le Peuch, CEO at SLB]

Well, simply said, I think Russia revenue represented approximately 5% of our consolidated revenue Q2. The decision that we have made last Friday to halt remaining shipment to Russia from all SLB facility will not impact our financial guidance. This decision extend what we have seen as our previous ban on shipment from the location that we had in United States, U.K., EU, Canada, into Russia, and we will continue to ensure that our remaining presence in Russia meets and exceeds all international sanctions.

[Arun Jayaram, Analyst at JPMorgan]

That's great. Thanks a lot.

[Olivier Le Peuch, CEO at SLB]

Thank you.

[Operator]

I apologize we will go back to the line of Scott Gruber with Citigroup. Please go ahead.

[Scott Gruber, Director of Oilfield Services and Equipment Research at Citigroup]

Yes, good morning.

[Stephane Biguet, EVP and CFO at SLB]

Morning, Scott. Morning.

[Scott Gruber, Director of Oilfield Services and Equipment Research at Citigroup]

Good morning to you. Yeah. D&I margins snapped back nicely in Q2, and in the past, you've talked about DNI as a mid-30s type margin business, at least near term. But in terms of thinking about the H2, can you build off that 34%? Should we expect those to grind higher in Q3 and Q4? Then more importantly as we think about 2024 and given all the digital growth if you think D&I margins could push into the high 30s especially with you know hopefully some of the APS headwinds fading.

[Stephane Biguet, EVP and CFO at SLB]

Hey, Scott, Stephane here. Yes, you've seen the DNI margins returning to levels we like in the mid-30s after the Q1 seasonal low. Just for clarification, this is almost entirely coming from digital because APS ended up somehow unexpectedly flat in terms of revenue. Really the entire margin expansion from Q1 to Q2 is digital which is good news. Can it go up higher than 34%? Yes potentially. You always have a you can have certain sales like exploration data et cetera that come. The mid-30s is a good goalpost for us with a few percentages up and down depending on exceptional sales.

[Scott Gruber, Director of Oilfield Services and Equipment Research at Citigroup]

We should still think about that in 2024 as well?

[Olivier Le Peuch, CEO at SLB]

Yeah, 2024, I think the trajectory we've seen in digital is not set to slow down. Because I think as I explained, multiple dimension and trends are concurrently shaping the future of our digital success. I think we expect it to continue well into the beyond the cycle as we call it, actually. The accretive, I would say contribution of digital will, over time, long term, be more and more accretive on the growth and more and more accretive on the margin.

[Scott Gruber, Director of Oilfield Services and Equipment Research at Citigroup]

Got it. Just a quick one on North America. Pretty impressive performance in Q2 with revenues up and the rig count in contrast to the rig count being down. Obviously, the Gulf of Mexico is helping you guys. Are you also seeing continued growth in that fit-for-basin strategy, and then?

[Olivier Le Peuch, CEO at SLB]

Absolutely.

[Scott Gruber, Director of Oilfield Services and Equipment Research at Citigroup]

Yeah. Go ahead.

[Olivier Le Peuch, CEO at SLB]

Absolutely. I think we that's what we call agility and fit strategy in the land part of North America has been helping us to shield ourselves from some of the macro trends. I think we believe that the lack of exposure to pressure pumping at scale and the fit-for-basin technology strategy partly in well construction has allowed us to continue to progress or to buffer some of the activity decline and expose us to actually a mix of performance that has been resilient in North America land and then complemented augmented if I may by the North America offshore where we have seen activity and revenue progression.

[Scott Gruber, Director of Oilfield Services and Equipment Research at Citigroup]

Got it. I appreciate all the color. I'll stay back.

[Stephane Biguet, EVP and CFO at SLB]

Thank you.

[Operator]

Next, we go to the line of Kurt Hallead with Benchmark. Please go ahead.

[Kurt Hallead, Head of Global Energy at Benchmark]

Hey, thank you. Good afternoon, everybody.

[Stephane Biguet, EVP and CFO at SLB]

Hey, Kurt.

[Olivier Le Peuch, CEO at SLB]

Good afternoon, Kurt.

[Kurt Hallead, Head of Global Energy at Benchmark]

You guys put up a really impressive free cash flow number in the quarter. You indicated that free cash flow dynamics would obviously improve in the H2 of the year. I'm just kind of curious, though, you know, close to $1 billion of free cash flow in the quarter itself, is this the dynamic now where you can continue to harvest that kind of cash? Is that level of free cash flow something that you think could be sustainable, you know, as you go into, you know, the Q3 and Q4 of this year?

[Olivier Le Peuch, CEO at SLB]

Look yes we are also quite pleased with the free cash flow performance in the Q2. It's as I said it's mostly improved working capital on top of the earnings of course. As you know there is quite some seasonality in our cash flow and working capital. We came out of a seasonally low Q1 with a quite a strong Q2. We again beat a quarterly record on DSO for our Q2, and our inventory efficiency improved quite a bit as well. It sets us quite well for the rest of the year. As you said, we always generate quite more cash in the H2. The $1 billion level is a good starting point for Q3, Q4, and we'll take it from there. We are slightly ahead of where we wanted to be and I think we can continue that way for the H2.

[Kurt Hallead, Head of Global Energy at Benchmark]

All right. That's great. That's fantastic. My follow-up, Olivier you know a lot of contract awards during the quarter. You discussed, you know, the emphasis on long-term visibility on a number of these projects. You know, it's easy for us on the outside to kind of look at what goes on with an offshore driller and look at their contract start date sometime in the future. Maybe a little bit more challenging to kinda connect those dots to, you know, how a service company and at what point in time does a service company get slotted in for those projects? I was just wondering, you know, for the benefit of everybody on the call and understanding you know where your visibility is coming from at what point in time you know do you guys do the Schlumberger you know get called into an offshore drilling project for example? What gives you the conviction and how can you convey that conviction you know to you know to the investor base and understanding that this cycle really does is different and has longer legs than what we may have seen in the past?

[Olivier Le Peuch, CEO at SLB]

No, I think it's a mix. It's a mix of, I think we, and you have seen many contracts, some of them have very long duration, more than five years or seven years, in recent award that we highlighted in April and this July. I think it's 3-5 years is the typical contract terms that we have. Every contract you see a framework contract that are being used to mobilize resource and to commit capacity across multiple years. This contract either start this year or start next year, and they go well beyond 2025 and supports the thesis of durability, duration, beyond mid this decade. Secondly, I would say that, you see also that we were announcing a few of the subsea, award, and we'll continue to see that in the H2. We quoted, our total booking for production systems, which is the long cycle, side of our business. You have the contract I was referring to, service contract, three, five, seven years, and many of them in Middle East and or offshore, as you have seen. You have the bookings that then are supporting two or three years of delivery, be it in subsea or be it in some of the large surface contract, as you have seen in Qatar, subsea, as you have seen in different parts of the Americas or Turkey. This is typically two or three years out of booking. We have been quoting $10 billion-$12 billion for a full year on the production systems. We are confident that this represent 1.1-1.3 book-to-bill ratio. This as we will exit 2023 we'll have this booking to fuel at least two years of growth going forward in our long cycle business. You combine these and you get many of the elements of duration on international, Middle East and offshore markets.

[Kurt Hallead, Head of Global Energy at Benchmark]

That's great. Really appreciate the color. Thank you.

[Olivier Le Peuch, CEO at SLB]

You're welcome. Thank you.

[Operator]

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

[Neil Mehta, Head of Americas Natural Resources Equity Research at Goldman Sachs]

Yeah, good morning, team.

[Olivier Le Peuch, CEO at SLB]

Good morning.

[Neil Mehta, Head of Americas Natural Resources Equity Research at Goldman Sachs]

Is just around more in around production systems. Margins were really good there. Can you talk about how we should think about the margin trajectory and also tie that into any commentary you have around the subsea which has been a source of momentum?

[Olivier Le Peuch, CEO at SLB]

Yeah. I think production systems is a as I said is an equipment mostly product equipment and long cycle on which we had suffered from some supply logistics constraints last year that we flagged. We said at the ][onset] as soon as this constraint will be behind us, we feel comfortable that the momentum on margin expansion will be matching what we have seen in the other core division that we have. This is starting to materialize. Our ambition is not stopping at this, at this margin. Our long-term ambition is to continue to grow and expand in line with the other core division, as we believe that operating efficiency, including into this long cycle, manufacturing efficiency and the pricing environment for this unique technology we have from subsea to surface from completion to actual lift or some process equipment that we are deploying in, across some offshore FPSO. All this combined to give us the, I would say, the confidence that this trajectory of margin expansion will not stop here and will continue to go. You have heard about the booking I was commenting on this. It's a booking and margin expansion journey for PS going forward.

[Neil Mehta, Head of Americas Natural Resources Equity Research at Goldman Sachs]

Olivier, when we saw each other a couple weeks ago you had just spent a lot of time on the road visiting a lot of customers in different regions. Wonder if you can just kind of go around the world and talk about customer conversations obviously name agnostic, and what are you seeing in terms of different basins in terms of activity?

[Olivier Le Peuch, CEO at SLB]

I don't want to be too specific. Obviously, I think I will reflect more on the general sentiment. I think the general sentiment is that first and foremost, energy security and capacity expansion still dominate the decision. The economics are seen as very favorable, and the outlook of the industry at large is seen as resilient. You have seen it for many major reaffirming their 2030 production volume and adjusting their strategy to make sure they maximize the opportunity to either accelerate their gas transition or sustain their oil production. This will mean investment and we see that in all the engagement we have. Then the NOCs, be it in Americas, in Africa, Middle East, or Asia, are pursuing their two things: either their production enhancement to make sure they continue to lift their production performance and then addressing energy security through their gas development typically. We see this everywhere, particularly in Asia. The customers are fairly focused on developing their gas asset, expanding and or reverting some of the trends of declining oil production, and to make sure they maximize the cycle, their participation to the cycle, and the participation to the international pool supply pool that is happening. It's broad. As I commented, during our time together, I think, commented that, we are seeing also many newcomers that are expanding into deep water, into, exploration rounds that are across the globe, in new territories or in new countries. This will attract more investment. This will attract, if the geology are right, future FID. It's in general driven by energy security, pool on international supply, and IOCs commitment to sustain their production towards the end of the decade.

[Neil Mehta, Head of Americas Natural Resources Equity Research at Goldman Sachs]

Thanks so much.

[Olivier Le Peuch, CEO at SLB]

Thank you.

[Operator]

Next, we go to a question from Luke Lemoine. Please go ahead.

[Luke Lemoine, Managing Director at Piper Sandler]

Hey, good morning.

[Olivier Le Peuch, CEO at SLB]

Morning.

[Luke Lemoine, Managing Director at Piper Sandler]

Hey, morning. Impressive award with the five-year contract with Petrobras for Delfi deployment across the organization. Seeing if you can maybe talk about the opportunity for additional contracts with other NOCs or majors for enterprise-wide Delfi and kind of the level of interest there?

[Olivier Le Peuch, CEO at SLB]

Yeah. We typically do not speak ahead of any public announcements the work we are doing on the ground to continue to prepare for further penetration of our existing customers. But yes, there are fairly advanced discussion with several customers to prepare for a transition and adoption of Delfi cloud solution, either for the geoscience workflow or for some of the drilling operation, as I was referring to or for some of the adoption of AI and unlocking the data. So we are seeing this and yes you will continue to see every quarter a new announcement that will come in the different, the three different dimension and trends that I was highlighting. You will see large contract in the future hopefully and materializing as well that will replicate the success we had with Chevron, who was the first very large enterprise deployment that many, many company are looking towards and using to reflect some of their future opportunity they have with us. That's happening at scale and we are pleased with progress but again it's a long journey and it's one customer at a time and it will take it will take years and the cycle will be long and will be accretive for the long run.

[Luke Lemoine, Managing Director at Piper Sandler]

Okay. Got it. Thanks, Olivier.

[Olivier Le Peuch, CEO at SLB]

Thank you.

[Operator]

Our next question is from Keith Mackey with RBC Capital Markets. Please go ahead.

[Keith MacKey, Director and Global Equity Research Analyst in Oil and Gas Service at RBC Capital Markets]

Hi good morning and good afternoon, everyone.

[Olivier Le Peuch, CEO at SLB]

Good morning, Keith.

[Keith MacKey, Director and Global Equity Research Analyst in Oil and Gas Service at RBC Capital Markets]

Just wanted to first ask on the subsea JV with Subsea 7 and Aker originally expected to close the end of next month. Can you just remind us of the key benefits of that transaction? Maybe give us an update on where you are in relation to closing, and if you expect any impact to the numbers or the way you might report the numbers in the production systems segment going forward would be helpful?

[Olivier Le Peuch, CEO at SLB]

Yeah first I think what we quoted at the time we announced the JV is that we expected this to close by Q3 this year, which is in two months from now. The progress we have made is that we have progressed towards obtaining the majority of the antitrust regulatory approval to move forward. We have progressed in our planning in conjunction with our future partners, and we'll be communicating on this as soon as we can to give you the materiality and the timing and the materiality of this as we will consolidate. Now it will be consolidated into the PS and into the revenue going forward at the time we will announce the closing. We'll give you the detailed information about that when it will be announced and we'll give clarity on the way we will report it. Good progress across the different jurisdiction and good progress very good progress on the planning to prepare for the closing as well. We're optimistic towards the near future.

[Keith MacKey, Director and Global Equity Research Analyst in Oil and Gas Service at RBC Capital Markets]

Thank you. Appreciate the comments. One final question for Stephane just on the buyback. As free cash flow is set to increase in the H2 of the year, should we expect any significant deviation from the you know $200 million or so run rate you've set for the H1 of the year? Is that still a good number to put in our models?

[Stephane Biguet, EVP and CFO at SLB]

Look the way you have to look at it Keith is really on our commitment to return a total of $2 billion to shareholders and it's between dividends and buyback. Yeah if you do the math you will get the average level of buyback in the Q2 in the H2 sorry yes it will continue of course.

[Keith MacKey, Director and Global Equity Research Analyst in Oil and Gas Service at RBC Capital Markets]

Perfect. Thanks so much.

[Operator]

Ladies and gentlemen that is all the time we have for questions. I will now turn the conference back to the SLB leadership for closing comments.

[Olivier Le Peuch, CEO at SLB]

Thank you, Leah. Ladies and gentlemen as we conclude today's call, I would like to leave you with the following takeaways. First, as our Q2 results clearly demonstrate, our market position, performance differentiation and technology leadership are fit for the cycle, and we continue to drive our financial performance. Second, as upstream investments accelerate in the international and offshore markets, these regions will lead our growth and lay a strong foundation for ongoing outperformance in the years ahead. Third, following a solid H1 and with significant visibility into the H2 of the year, we affirm our confidence in our full-year financial targets. This is a compelling environment for our company, and today, we are more returns focused, disciplined, and efficient than ever before. We could not ask for a better backdrop to execute our commitment to shareholder returns. I remain very confident in our strategy and fully trust the SLB team to continue delivering strong performance for our business. With this, I will conclude today's call. Thank you all for joining.

[Operator]

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

Participants

Executives

• James McDonald, SVP of Investor Relations and Industry Affairs
• Olivier Le Peuch, CEO
• Stephane Biguet, EVP and CFO

Analysts

• Arun Jayaram, Analyst at JPMorgan
• David Anderson, Director and Senior Equity Research Analyst at Barclays
• James West, Senior Managing Director at Evercore ISI
• Keith MacKey, Director and Global Equity Research Analyst in Oil and Gas Service at RBC Capital Markets
• Kurt Hallead, Head of Global Energy at Benchmark
• Luke Lemoine, Managing Director at Piper Sandler
• Neil Mehta, Head of Americas Natural Resources Equity Research at Goldman Sachs
• Scott Gruber, Director of Oilfield Services and Equipment Research at Citigroup