Schlumberger Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
October 21, 2021

There are 13 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 and instructions will be given at that time. 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. Madhu Amazia. Please go ahead.

Speaker 1

Thank you, dear. Good morning and welcome to the Schlumberger Limited Third Quarter 2021 Earnings Conference Call. Today's call is being hosted from the Schlumberger Doll Research Center in Boston following the Schlumberger Limited Board meeting held earlier this week. Joining us on the call are Olivier Persch, Chief Executive Officer and Stephane Biguet, Chief Financial Officer. Before we begin, I would like to remind all participants that some of the things made 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 filings 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 Q3 press release, which is on our website. With that, I'll turn the call over to Olivier.

Speaker 2

Thank you, Andy. Good morning, ladies and gentlemen. Thank you for joining us on the call. In my prepared remarks today, I will cover 3 topics: our Q1 results our view of the near term macro and the exceptional growth opportunity ahead of us. I will then share some insights on the Middle East and Offshore markets and finally, A first view of the 2022 growth outlook.

Speaker 2

Stephane will then give more details on our financial results, and we'll open the floor for questions. The Q1 results further emphasize our returns focus, consistent execution and the advantaged mix of our portfolio. Growth momentum was sustained, and we delivered a 5th consecutive quarter of margin expansion, achieving the highest pretax operating margin Since 2015 and cash flow from operations in excess of $1,000,000,000 Let me share with you some performance highlights from the quarter across our core, Digital and New Energy. In our core, first, margin expansion was led by well construction and performance where we fully see the 2nd show growth opportunity, driving operating margins in both these divisions above mid teens, the highest levels In the last 3 years, revenue quality improved, boosted by favorable activity mix and higher new technology uptake that delivered strong margin expansion. 2nd, internationally, we recorded growth in all three areas, with revenue up 11% year on year, consistent with our We start with our ambition of double digit revenue growth compared to the second half of twenty twenty.

Speaker 2

International margin further expanded, exceeding pre pandemic levels and are The highest since 2018. In North America, revenue growth was sustained, albeit impacted by transitory supply and logistics disruption. Margin also continued to expand with operating margins firmly at double digits. Finally, We are pleased with the very sizable activity pipeline secured during the quarter through competitive standards, direct awards and contract extension, some of which include net pricing improvement, building on our differentiated performance, integration capabilities and technology. These wins enhance our market position, creating a long tail of activity and a platform to further our new technology adoption and digital deployment, Strengthening our leadership as we enter an exceptional growth cycle.

Speaker 2

We are delivering on the promise of our performance strategy, We leverage our advantaged platform to capture the exciting growth and outperform the market in our core going forward. Moving to digital. We continue to progress our platform strategy this quarter, expanding our offering to the acquisition of independent data services The strategic investment in Deep IQ to further advance our digital technology offering and the adoption of AI solutions in our industry. In Digital Production Operations, we announced a partnership with AVEVA to expand powerful edge and IoT solution to the field, complementing our Agora platform And Sensia Solutions. In the Digital Drilling, we successfully completed the 1st fully automated section drill offshore At the Hebron platform for ExxonMobil in Canada, as you have seen in this morning's earnings release.

Speaker 2

This achievement It's a significant step for our industry, particularly offshore, and signals a momentous opportunity to apply digital technology to create a step change in well construction safety, Performance and Carbon Footprint. As shared recently, we are seeing the adoption of digital solution accelerate in our industry. And whilst we are in the early innings, we're excited about the prospect of transitioning the majority of our software customer base of over 1700 companies to our digital platform during the next few years. This growing adoption will generate an expanding Set up digital revenue streams over a long horizon as we transition every customer to new digital solution for the data, workflows and operations. Moving to New Energy.

Speaker 2

We advanced our portfolio by taking a position in stationary energy storage to our strategic investments in energy. A company with differentiated metal hydrogen battery technology. This represented new opportunity set and an expansion of total market in a sector with significant growth opportunities. In Curo Energy, following the success of the pilots in our technology facility in France, Celsius Energy has secured 5 commercial contracts in Europe. This is a significant achievement in the commercialization roadmap for Celsius As a low carbon solution for heating and cooling buildings, contributing to global efforts in reducing emissions.

Speaker 2

To conclude on this quarter performance, we once again demonstrated excellent progress in our strategic execution across our portfolio, Supporting outstanding results. And I want to thank the entire Schlumberger team, not only for delivering another strong quarter, but for their unwavering And I would like to turn to the near term macro Especially over the last few weeks, with coal and gas price attaining recent highs, inventory at their lowest level in recent history, A relevant demand and encouraging trends in the pandemic campaign and efforts. This strengthening industry fundamentals, Combined with the action of OPEC plus and continued capital this spring in North America, I firmly established a prospect of an exceptional multiyear growth cycle ahead. In the international markets, all regions are set to benefit from this highly favorable environment, something not seen internationally Since the last super cycle. This expansion will occur at different bases across different basins, operating environments and customer groups, Resulting in a sustained multi pronged growth cycle.

Speaker 2

Our broad exposure across these different dimensions put us In an advantage position to fully seize this growth opportunity. For example, this growth inflection is already visibly underway in Latin America, Sparked by the resumption of exploration and the initiation of long cycle development campaigns. Activity are strengthened throughout 2021. And revenue in this market is already at 2019 pre pandemic levels. Year to date revenue growth in Latin America is at 30%.

Speaker 2

We brought activity growth across multiple countries, including Argentina, Brazil, Ecuador and Guyana. This growth is expected to strengthen further in the coming years due to ongoing long cycle development campaigns. By contrast, in the Middle East, Where activity has been more subdued in 2021, the market conditions are set for a material uptick of activity in the coming quarters. The combination of short cycle activity to meet supply commitments, strategic oil capacity expansion And the acceleration of gas development projects will result in a significant increase in investment throughout 2022 and beyond. Our recent success in TENER awards, as detailed in our earnings release, strengthens our market position and with our Strong presence and commitments will benefit the most from this exciting outlook in the region.

Speaker 2

In the offshore markets, We're also set for a strong resurgence this cycle. Real activity grew for the 3rd, 2nd short quarter internationally and is expected From discovery to well construction, production and recovery, and are creating the conditions for offshore operators to reinvest with confidence in this cycle. North America, the imminent resumption of lease sales in the Gulf of Mexico where we have significant market presence will drive additional offshore growth As operator capitalized on the advantage of this prolific basin and its existing takeaway infrastructure and extract more value From the core upstream position through exploration and tiebacks. Taking these factors together, a broad offshore resurgence will result from IOCs Building on their advantage hubs, independent fast tracking development on their recently acquired assets and NoC, unlocking their gas and oil reserves recovery potential. Our technology, digital enablement and integration capability are critical advantage in this market environment and are resulting in significant new contract awards, Finally, we're extremely pleased with our customer reception of our transition technology portfolio And the accelerated adoption of this technology that reduced the carbon impact of oil and gas operations.

Speaker 2

This portfolio is focused on fugitive emissions, Flaring and electrification, and it's already helping customers decarbonize operation, advancing our net zero ambition And strengthening our sustainability leadership in the industry. Some example of this impact are cited into highlights. Turning to the Q4 outlook. Directionally, we anticipate another quarter of growth with an ambition for growth across all divisions. Rolf will be led by Production Systems and Digital Integration, benefiting from a year end sales uplift tempered by seasonal By typical seasonally in reserve performance and well construction, this should result in an overall sequential growth rate similar to the prior quarter.

Speaker 2

With this Q4 outlook, we expect to reach our double digit international growth ambition for the second half of twenty twenty one When compared to the second half of twenty twenty, it will also translate into full year revenue growth both internationally and in North America after adjusting Building on the 3rd quarter operating margin and recent highs, our ambition is to sustain this level of margin performance in the 4th quarter. Consequently, on a full year basis, we remain confident in attaining the high end of our guidance of 250 to 300 bps EBITDA margin expansion, An excellent foundation for expansion in the year ahead. Now I would like to close my prepared remarks with our earliest view of 2022. Against the backlog of the constructive environment I described earlier, our confidence in the onset of an exceptional growth cycle is reinforced. At this early point in the planning cycle and that sort of setback in economic and pandemic recoveries, we anticipate very strong Global Upstream Capital Spending Growth.

Speaker 2

This growth will impact all basins, every operating environment, short- and long cycle activity and all customer groups. North America, we anticipate capital spending growth to increase around 20%, impacting both the Onshore and Offshore markets. Internationally, growth momentum will strengthen, and early indications point to strong capital spending growth in the lowtometeens, Driven by both short cycle activity and the onset of multiyear capacity expansion plans. Through our performance strategy, We have strengthened our position across multiple dimensions. In North America, we have enhanced our market position and now biased to accretive growth onshore And we benefit from strong growth offshore in the Gulf of Mexico.

Speaker 2

And in international markets, we have built a multiyear pipeline of Strong activity in the most prolific basins that will lead the superpower response both in oil and gas. More importantly, We have enhanced our earnings growth potential significantly, as demonstrated by multiple quarters of margin expansion. In North America, Our operating margins are primed to exit the year at the highest level since 2015, which, combined with the favorable market position I've just described, It's an excellent platform for margin expansion. Internationally, we're also set for peer leading margin expansion as we exit 2021 with margin above The combination of strong activity growth and operating leverage will support durable margin expansion. Additionally, to our feedforward base in hand transition technologies and capacity tightening, we see favorable condition for broader net pricing net gains Our digital platform strategy and growing customer adoption, we anticipate an acceleration of our digital journey, resulting in active revenue and earning growth.

Speaker 2

Consequently, we expect margins to expand further in 2022, supporting material earnings growth potential, I'm increasingly confident in achieving our mid cycle adjusted EBITDA margin ambition of 25% or higher and sustaining a double digit free cash flow margin throughout the cycle. I'll now pass the call to Stephane.

Speaker 3

Thank you, Olivier, and good morning, ladies and gentlemen. The Q3 earnings per share, excluding charges and credits, was $0.36 This represents an increase of $0.06 compared to the Q2 of this year and an increase of $0.20 when compared to the same period of last year. In addition, we recorded in the Q1 a $0.03 gain relating to a start up company we had previously invested in. This company was acquired during the quarter, and as a result, our ownership interest was converted into shares of a publicly traded company. Overall, our Q3 revenue of $5,800,000,000 increased 4% sequentially.

Speaker 3

Pretax operating margins improved 120 basis points to 15.5 percent And have now increased 5 quarters in a row. Margins expanded sequentially in 3 of our 4 divisions, With very strong incremental margin in both reservoir performance and well construction. This performance was due to a favorable geographic Mix, driven by continued international revenue growth as well as a favorable technology mix with increased exploration and appraisal activity and New Technology Adoption. Companywide adjusted EBITDA margin of 22.2% in the quarter increased 90 basis points sequentially. It is worth noting that this margin expansion was achieved Despite the well documented disruptions in global supply chain systems and inflation in select commodities and materials as well as in logistics.

Speaker 3

Through our global supply chain organization, we are successfully engaging with suppliers and customers to jointly navigate inflationary trends. We are collaborating with our customers to optimize planning And where applicable, make the necessary adjustments through existing contractual clauses or negotiation. As a result, so far, we have largely been able to shield ourselves from the inflation effects. As the growth cycle accelerates, We will continue to be proactive, dynamically adjusting sourcing strategies and Leveraging our diverse global manufacturing footprint and supply network. Let me now Go through the Q3 results for each division.

Speaker 3

3rd quarter digital and integration revenue of $812,000,000 was essentially flat Sequentially, as lower sales of digital solutions were offset by higher ATS revenue. Pre tax operating margins increased 154 basis points to 35%, largely as a result of improved commodity pricing Our Canada EPS project. Reservoir Performance revenue of $1,200,000,000 increased 7% sequentially. This revenue growth was entirely driven by higher international activity. Margins Expanded 202 basis points to 16%, largely due to higher offshore and exploration activity as well as accelerated new technology adoption.

Speaker 3

Well construction revenue of $2,300,000,000 increased 8% sequentially 230 basis points to 15.2 percent

Speaker 2

due to

Speaker 3

the higher drilling activity and a favorable geographical mix. Finally, Production Systems revenue of $1,700,000,000 was essentially flat sequentially, While margins decreased 27 basis points to 9.9 percent. Now turning to our liquidity. Cash flow from operation was once again strong as we generated $1,100,000,000 of cash flow from operations and free cash flow of $671,000,000 during the quarter. This represented a significant sequential increase When adjusting for last quarter's exceptional tax refund of $477,000,000 We paid $42,000,000 of severance during the quarter.

Speaker 3

Excluding these payments, the working capital impact on our cash flow was neutral, despite the revenue increase. This was driven by a very strong DSO performance. We expect the 4th quarter To show another quarter of non cash flow generation, which positions us favorably to achieve our ambition of delivering full year double digit free cash flow margins. As a result of the strong cash flow performance, net debt decreased sequentially by $588,000,000 to $12,500,000,000 During the quarter, we made capital investments of 3.99,000,000 This amount includes CapEx, investments in APS Projects and MultiClient. For the full year 2021, we are now expecting to spend approximately €1,600,000,000 on capital investments.

Speaker 3

In total, during the 1st 9 months of the year, we have generated over $2,700,000,000 of cash flow from operations And $1,700,000,000 of free cash flow. As a result, we have been able to progress significantly On our commitment to deleverage the balance sheet, this is evidenced by the fact that gross debt has decreased by almost $1,500,000,000 since the beginning of the year. Net debt has reduced by $1,400,000,000 during the same period. Overall, I am very pleased with our cash flow performance and the progress we are making towards strengthening the balance sheet. This will provide us with greater flexibility in our capital allocation.

Speaker 3

I will now turn the conference call back to Olivier.

Speaker 2

Thank you, Stephane. So I think we are ready for the Q and A session at this point.

Operator

Thank you. You may also remove yourself from the queue by pressing 1,000,000 again. One moment please for the first question. And our first question is from James West with Evercore ISI. Please go ahead.

Speaker 4

Hey, Good morning, Olivier.

Speaker 2

Good morning, Jed.

Speaker 4

Olivier, 5 sequential quarters in a row of margin Growth and really strong execution. How do you think about or how are you considering or planning for Continued strong execution as revenue starts to really accelerate as we go into next year.

Speaker 2

Thank you, James, for the question. Indeed, we're very, very proud and very satisfied with the last 5 quarters. I think they have demonstrated our Ability to leverage restructuring, porphyry upgrading and the foundation we have put in place during this reset, We have operated in the last 18 months. But furthermore, I think the looking forward as the cycle will unfold, I think there are 2 or 3 characteristics that are that will play favorably and that will help us continue to expand the margin as we have seen in the last quarter. So first, I believe that the market outlook will create favorable market environment, Exposing the bases where we have a strong position internationally and in particular Middle East or offshore, As I commented during my prepared remarks.

Speaker 2

Secondly, I believe that performance still matters And will matter increasingly. Hence, our technology offering, Fit for Basin, transition technology and integration capability We'll continue to make a huge impact. We'll create a premium for our service in both well construction, reservoir performance and We see an acceleration going forward as we have seen that we have continued to evolve, progress And mature our digital platform strategy, and we are in the last innings of developing this strategy on the platform, on the foundations. Hence, we are now seeing increased adoption and acceleration. And we expect, as I shared earlier, that this will be increasingly accretive to growth and earnings going forward.

Speaker 2

And finally, as the revenue as the activity both Internationally and in North America will increase. This will tighten the market and create the condition for pricing. So when you combine this favorable market exposure, the track record we have, the technology adoption that give us a premium Our performance differences in integrated contract with digital, we have the formula for supporting our ambition for 25% or higher EBITDA margin by mid cycle.

Speaker 4

Right. Okay. Great. That's very helpful Olivier. And then Maybe a follow-up on that.

Speaker 4

On the digital side, this will be the 1st cycle where we really see digital as a big Part of the business, there's been, as you alluded to, widespread adoption, but we haven't yet seen a growth cycle with That adoption, so how do you think that plays out? Is it going to allow you I mean, obviously margins will be part of it, does it allow you to grab more market share? I mean, what are the What does digital do in an upcycle that is essentially a strong one like we're projecting?

Speaker 2

I think I will highlight 3 things that will be the result of our success and our investment and leadership in Equitable. 1st, obviously, the acceleration of digital adoption by customer through workflow data and digital operation offering. You are seeing element of this being announced every quarter, and you will continue to see this unfolding across the different customer groups and across different Geographies of this will mean accretive growth in 2022 to our top line by the digital offering we have. The second aspect is the long tail effect beyond the cycle. I believe that the effect is certainly will last Considering the very significant size of our customer portfolio, the fact that customer Going into it over the long run, we are seeing multiple effect of revenue stream being deployed across Multiple quarters and multiple year across the different customer group we are addressing.

Speaker 2

And finally, this is generating margins fall through That are accretive to earnings and will be continue to help us operate DNI at above 30% or mid-30s And also, we'll result into our ability to extract from digital operation and our own operation, partly integrated performance, the Well construction weather performance, the ability to extract more efficiency and hence to expand and support margin expansion on those divisions.

Speaker 4

Very good. Thanks, Louis.

Speaker 5

Thank you.

Operator

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

Speaker 6

Hi, good morning. I want to ask you a couple of questions about the unconventional contracts that you announced in Saudi and Oman. So could you just help us understand the pricing mechanisms there? Are these lump sum? Is there a baseline of stages per day?

Speaker 6

And also just curious where you're sourcing all this equipment? Do you have all this equipment? Does it require capital? Just a little bit more background on these contracts, please. Thank you.

Speaker 2

I think this contract are a large integrated contract that we have been winning on our value proposition based on performance, Demonstrated efficiency and ability to deploy technology that make an impact on execution. So we do have the capacity in place. We have demonstrated to pilots and or to engagement that we had before that we could deliver the required performance that the customers are expecting, And we have trusted accordingly, and we have demonstrated during the last few years that we have improved our ability to engage, digitalize our operation And work with customers to get this integrated contract with Telestika or other to be performing and I'm delivering the margins and earnings we need. So we will continue to extract value From this contract over the period of time, so we are very proud of winning those contracts. They are based on performance.

Speaker 2

They are based on technology and Our team on the ground, they have done a great job of demonstrating we could take these contracts and create value for customer and for ourselves.

Speaker 6

And then in terms of the equipment required, do you need to add equipment? Do you need to build out at all?

Speaker 2

Now we have started to mobilize this equipment that we have already in place. And obviously, this will pull equipment from our A place where we have, but we have the coupon in place, and we're able to deliver upon the committed contract we are taking

Speaker 6

And so my other question is around offshore. You seem to be a bit more optimistic than most on the offshore market. You announced several awards recently. Are you confident enough to say we're at an inflection point you think in offshore spend, which I would think would be quite accretive to your margins with higher utilization was Subsea and also all the technology you have in well construction and you also mentioned digital as well. Could Just kind of talk a little bit about maybe kind of how you're seeing this unfolding over the next year or so?

Speaker 2

Yes. I think I remain constructive about the offshore environment for a couple of reasons. First, because this offshore environment has been strengthening Steadily for the last few quarters, and that's been the rig activity has been increasing lately. I think we have in the offshore international market, growth been going in the mid teens year on year in H2 over H2. So that's a proof that This activity is translating into revenue opportunity.

Speaker 2

And I think the offshore markets, both partially and internationally, have been growing Repounding in the last 4 to 2 to 4 quarter. But now looking ahead and looking at the activity, we see a lot of Leading indicator, first, the FIDs. If you look at the actual FID of this year or if you look at the projection of Some of the WoodMac projection recently published showing that there will be in excess of $100,000,000 of offshore FID, Most likely, it's sanctioned by the end of this year, and that will almost double next year. And out of this, 50% of that will be deepwater. So there is an acceleration of FID Back to the 2019 level that is on the horizon, and that is a result of IOCs Going to exploit the advantage basin and focusing on the hubs.

Speaker 2

The national oil company Exploiting and unlocking the oil and gas reserve to participate to the supply. And finally, there has been a lot of asset changing trading hands in the last A few quarters and this international independent are also pursuing accelerated FID in different basins we are exposed. And the result of that is Subsea backlog is growing. We are definitely above 1 Book to bill ratio, and we will certainly be growing year on year in excess of 30% or 40% Our booking from 2020 to 2021. So we are indeed quite positive and constructive, This plays very well to our portfolio because this is where our construction was our performance in exploration appraisal in large offshore contract Getting the benefit, and it was very visible during the Q1.

Speaker 2

So you could take this as a proxy of the future.

Speaker 6

Thank you, Olivier.

Speaker 2

You're welcome.

Operator

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

Speaker 7

Hey, good morning everybody.

Speaker 8

Good morning, guys.

Speaker 7

Good morning. I guess first thing, kind of a macro kind Higher level question about kind of this investment cycle. There seems to be this growing narrative out there that The oil and gas industry is going to continue to under invest this cycle given the disciplined narrative of the E and P industry and also This energy transition focus. Obviously, you talk to more E and P and oil and gas Producers than probably anybody worldwide. And so given the commentary that you expect exceptional growth in a multiyear cycle in the oil and gas industry, This obviously leads you to believe that there's not going to be this underinvestment going forward.

Speaker 7

So maybe if you can kind of provide some color around this and thoughts around the disconnect between some investor perception That you're not going to see a reinvestment cycle

Speaker 8

going forward.

Speaker 2

I think the condition I've said is a unique combination that we are living with. We are living with from the result of Under investment in the last 5 to 7 years, combined with a reset that we have expensed in the industry during 2020 And also an elevated capital discipline, partly in North America. When you combine this and look at the demand outlook That will surpass through the GDP growth expected for the next 2 or 3 years. That will surpass the 2019 level sometime next year. I think the result of which will create a pull International supply and we'll create a necessity for reinvestment in our industry.

Speaker 2

So The questions are very simple. There is an anticipated deficit of supply if there is no reinvestment return into our industry. You have seen that many NOCs have signaled that they are set to reinvest into their capacity going forward. The IOCs are reconcentrating on their advantaged basins. They will not be the one leading the growth in this cycle, but they will be the one Pursuing still the advantage basin to generate the cash they need to transition to new energy.

Speaker 2

The independents are taking benefit of this position, I've inherited some prolific assets and are redeveloping those assets with our support and the support of the entire industry To participate to the supply. So I think the condition has set undoubtedly that this demand will have to We met with supply, and this supply cannot come with inventory, cannot come with only releasing the OpEx spare capacity. More will have to be built. Hence, it will create activity growth in the coming years. And it's not only a shot in 2022.

Speaker 2

This FID, I talked about this capacity expansion in Middle East, a long term project that will have a long tail effect beyond the 'twenty two, 'twenty three horizon.

Speaker 7

Okay. All right. That's perfect. Just one quick follow-up. Just some clarification on your guidance, Q4, I think you said Flat margins.

Speaker 7

Was that flat consolidated margins or was that flat for each segment? In other words, if you run the mix, could actually margins Because favorable mix, could margins be up?

Speaker 2

No, no. Charles, we don't disclose and we don't guide on down to the granular Division, I think we are talking about the flattish margin, global margin and In a sense, maintaining very, very high margin and exiting in the mid teens globally for the company as operating margins And the same level of EBITA margin. So that's the what matters for us is the exit rate and the implication of this exit rate as we enter 2022 As a platform, as a foundation for margin expansion going forward. So the mix is giving us this result Of flat or about mid teens margin, and that's what we ambition. And we are very proud of this maintaining this level

Speaker 7

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

Speaker 2

Thank you.

Operator

Our next

Speaker 9

There's 3000000 to 4000000 barrels of productive capacity offline from OPEC. And as the cartel methodically brings Back to this output called in 400 kilobytes D increments. I wanted to get your thoughts as is this creating any near term service Opportunities for you. And I was wondering if you could maybe elaborate on any shifts globally in spending from maintenance CapEx type spending to Growth in productive capacity, oil and gas and what this means for Schlumberger.

Speaker 2

Yes. I think As the OPEC plus will continue to release this incremental oil to the market to be Behind the supply curve, behind the demand curve, we are continuing to see an increase of intervention activity, short cycle activity That is starting to materialize in the OPEC plus countries where we are seeing mobilization of Dimension, stimulation, as we have seen, lifting and pollution maintenance activity. So that's the effect on short cycle. This will also include a rig of remobilization to do some infill drilling to start to support this increment of For the country that have the capacity to expand fast and this will turn into more long cycle As both the gas development is accelerating, and you have seen the Jaffour announcement from Saudi, And the continuation of large gas in the Middle East and elsewhere as well as the commitment that 2 or 3 We have taken in the Middle East particularly around expansion of production capacity, permanent capacity towards the horizon 24%, 20%, 27%, depending on the country. So what you talk about has an impact on short cycle, This is an underlying activity growth coming from long cycle as well.

Operator

And our next question is from Arun, do you have any follow-up? We'll move on and we'll go to the line of Conor Lina with Morgan Stanley, please go ahead.

Speaker 10

Yes, thanks. Just on the first point here, I just wanted to return to Chase's question and just think through some of the dynamics in the Q4 here. So I would think with digital being an area that you called out as Supply chain issues aren't getting worse that you would naturally have some expansion in the margin in the Q4. So I'm just curious what I'm sort of missing in that framework. What's your What type of issues are you risking or accounting for?

Speaker 2

No, it's a mixed effect. I think you have to account for To affect first the production system that had some logistics and Supply related delay into delivery will have a sizable catch up in the Q4. And this Segment, we are very happy with the double digit margin and offset for margin expansion. This will be in a mix Slightly dilutive to our margin overall, and that will offset some of the what you could expect from a digital fall through, Well, we expect a stronger end of year sales. But also, you have to add to the mix the fact that you are In going to a seasonal effect in Northern Hemisphere and to lower mix of expression appraisal, That will have an effect on seasonality of our performance.

Speaker 2

That is something that we that happens every year. And where the Q3 is typically the high margin quarter due to this favorable offshore exploration appraisal mix That declined for 1 or 2 quarter before it rebounds strongly every spring. So that's when you put this mix together, you result Maintaining the margin at the level we are putting, which is something remarkable and entering the 2022 on

Speaker 10

That's helpful context. Thank you. Second one is So you did have some integrated projects you disclosed in the press release. As we think about This portion of your business, I mean, it certainly has been characterized by yourself and peers as probably the later area where you're going to see pricing improvement. I guess my question is effectively why?

Speaker 10

It seems to me that the service companies that can really execute that kind of large scale integrated work is A very short list and it seems like there's a lot of value to being delivered to the customer from that type of contract. So why isn't this an area that we should be more excited about

Speaker 2

No, I think it has remained competitive due to the sheer size of this contract. But until the capacity in the market is stretched and is tightening, I think you will see that the market remains competitive on large integrated contracts. Our capital discipline, the activity growing in all basins is set to create a condition for the tightening and hence lifting on the core pricing of our offering. Now we are still very satisfied with these awards Because we have demonstrated that we through integration, through performance, through technology, including digital And Trakke Corp, we have been differentiated in our ability to sustain outperformance on those contracts and create the value we need To elevate the margins.

Speaker 10

All right. Thank you. I'll turn it

Speaker 2

back. Thank you.

Operator

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

Speaker 5

Yes, good morning. Good morning, Scott. Good morning. Olivier, you're feeling better about your mid cycle 25% plus EBITDA margin target, which seems warranted given the backdrop here. But if I just look at consensus estimates, at least the market believes It would take you a while to achieve.

Speaker 5

So if you kind of extend consensus, assume 10% annual growth in 'twenty four percent, 'twenty five percent and extend to 30% -ish Type incrementals, the market is forecasting in 2022 and 2023, it would actually take about 5 years to get to 25% plus EBITDA Do you think you can outpace 30% incrementals over the next few years and hit that 25% margin faster than 5 years?

Speaker 2

I think first, it's not a matter of if, but when we'll hit and exceed this 25% EBITDA. We have been doing it. We have been delivering over 30% recently. The market condition, as we foresee Going forward, as I've commented earlier, favorable with the right basin and operating environment mix that is favorable to our Margin mix, our technology adoption, our performance through integration and digital operation And our accretive digital mix, I think, are putting the condition before pricing kicks in to give us the The outlook, a positive outlook and constructive outlook on this, so that we will indeed ambition to achieve this before 5 years. Okay.

Speaker 1

And do you think you

Speaker 5

can get there without much pricing? The pricing gains just always take a while to kind of move across Discrete products into the bundled contracts and then kind of your average selling price. If you can get The other drivers can get there faster without much pricing?

Speaker 2

Some of the performance to date, Okay. Pulling and elevating the performance of our divisions to the highest level in 3 years or more And restoring through porphyry grading North America, I already approved that we can move our margins through Execution through performance, through high guiding visibly. So can we move Forward, I think pricing will only accelerate the time by which this will be met. But we are still constructive that we will Achieve this, individuality of pricing, and that pricing will come as a bonus to elevate beyond 22 percent 25%.

Speaker 5

Got you. Great to hear. Thanks for the

Speaker 2

color. You're welcome.

Operator

Our next question is we're going back to the line of Arun Jayarayam. Please go ahead.

Speaker 9

Yes. Thanks for letting me back in. So Olivier, year to date, You've reduced debt by about $1,500,000,000 and I wanted to get your thoughts on how you're thinking about the priorities for free cash flow generation Between cash return, the dividend and the balance sheet and also how you're thinking about Schlumberger's investment in Liberty now that the lockup

Speaker 3

I'll take this, Arun. Look, our immediate priority remains The deleveraging of the balance sheet. And yes, we've progressed quite well, and we are very happy with it. So now we do have a clear line of sight to Our 2 times net debt to EBITDA target leverage, and we said we should do that by the end of 2022. With the earnings expansion we are expecting in this growth cycle and our continuous focus on capital stewardship, Yes, we will continue to generate significant excess cash in the next few years.

Speaker 3

So this will allow us to maintain Healthy balance sheet and it will give us the flexibility to increase returns to shareholder as well as fund new growth opportunities. As it relates to returns to shareholders, this is something we will continue to review with our Board of Directors as the cycle unfolds And the deleveraging of our balance sheet accelerates. And as it relates to new growth opportunities, we will whether it's in Digital, new energy, any new investment, we will continue to look at under the strict lens of our returns based capital strategy framework. Your question on Liberty, clearly, we are happy with the transaction we made now more than a A year ago, we are benefiting from the recovery in North America through a significant appreciation of our equity stake there. And yes, Monetization is clearly an option.

Speaker 3

The timing and the pace and the magnitude of this monetization will be based On the market conditions and the outlook, but we'll make sure we'll optimize it basically.

Speaker 2

Thank you.

Speaker 11

Next, we go

Operator

to the line of Roger Read with Wells Fargo. Please go ahead.

Speaker 5

Yes. Good morning.

Speaker 12

Thanks for having me on here. I guess I'd like to come back to the 25% margin goal for EBITDA, but think of it maybe in a slightly different way. You've But think of it maybe in a slightly different way. You've got obviously the typical cyclical recovery, So utilization, you'll get some pricing. You talk about digital as one of the big separating factors.

Speaker 12

And I was wondering if As you look at the goal to 25%, maybe a weighting of where you think that could go? If you thought What would be normal for utilization, normal for pricing and then digital on top? Is it a third, a third, a third? Is it fifty-fifty? I'm just kind of curious How we should think about that coming through?

Speaker 2

I think it would be difficult to give you a precise outlook because this will depend on every division And almost on every geography, Philippe, on a mixed outlook, we foresee. But suffice to say that I think operating leverage, we didn't need being a base for our margin expansion to the way we execute with efficiency Using our own digital transformation to execute and extract performance from our execution. So that's the base. Above that, I will place the technology first and the technology mix Adoption from Fit for Basin that are highly differentiated and successful in all basin. I will include the Transition technology that are starting to emerge as a unique differentiator.

Speaker 2

And it will include also the integration delivery performance in our integration contract. And then indeed, you are correct, our digital expansion will be favorable On top, so I think you have these three things, but I don't want to be starting to be trying to I create a boundary between these. I don't think it's appropriate, and I think it will depend on every basin. And every division will have a different trajectory, but we I'm confident that across the portfolio we have, considering the international mix, considering the offshore, considering the technology adoption that is coming back, I I think this we have the path forward.

Speaker 12

Okay, great. Thanks. And then just an unrelated follow-up. I was curious, you talked about a lot of major projects and so forth globally. We've seen obviously some pretty extreme pricing in LNG and natural gas overall.

Speaker 12

So if you just kind of looked at natural gas as a driver on the project side or the activity side, anything globally you could say, looks Like it's improved over recent months or recent quarters or anything on the sort of larger project side there that

Speaker 2

Guiles is there for a long time as a So I think you see that the existing reserve, be it on commercial or conventional, offshore and onshore, We'll be commercialized by our customers as long as they have a path to market Through LNG, they have a path to market to pipeline, so we see this accelerating. You have seen some of the critical enhancement we made this morning Relating to onshore, offshore and commercial and commercial gas developments, and we see it as a trend that is Not about to stop now. We'd accelerate. I think the gas supply demand is misbalanced this year. We'll recover a little bit Next year, but we'll continue to see strong trajectory going forward.

Speaker 2

And we have a few countries that are committed to accelerate their gas transition. India is India is certainly the most visible one that will step change their consumption of gas and will then participate to fuel The gas demand will itself expand in gas supply as well domestically. So Middle East domestic gas, India as an engine of growth for gas beyond the current mix and some specific security of Supply that will trigger some gas development from existing gas, the redevelopment Our short cycle activity. So I'm optimistic and very, very pleased with the gas contract we have been winning this quarter.

Speaker 12

Thank you.

Operator

Thank you. And our next question is from wakar Syed with ATB Capital Markets. Please go ahead.

Speaker 11

Good morning. Thanks for taking my question. Olivier, just one broader question. You've given us some good guidance on upstream capital spending for international markets and North American markets for next year. Now with respect to exploration budgets in particular, do you see the growth rate of exploration spending in line With otherwise global spending or higher or lower?

Speaker 2

It's too early to give a Specific guidance for exploration, what we say for exploration is that we are seeing 2 things coming back. We are seeing some seismic activity coming back, It's growing, but what is more critical is the near field exploration is triggering more Activity in exploration going forward as everybody wants to get better return on the existing infrastructure to kind of tie back. And hence, we have seen some licensing rounds as well. So licensing rounds, some seismic survey coming back and Exploration near field exploration for future infill or tieback is what we see. So to give you a magnitude, directionally, it will improve it will increase.

Speaker 11

And then with respect to the APS business, previously there were Some plans for asset divestitures. Are those plans on hold? Are you still pursuing those?

Speaker 3

Look for Walker for our EPS asset in Canada, which is what we discussed previously. We have received offers We've various commercial constructs, and now we are just in the process of evaluating the potential merits and risk associated with those proposals. So this is what we are doing now. In the meantime, we are, of course, managing these assets as to optimize cash flows In the current commodity pricing environment, it generates quite a lot of cash flow. Okay.

Speaker 11

Thank you very much. Appreciate the answers.

Speaker 2

Welcome.

Operator

And next we go to the line of Neil Mehta with Goldman Sachs. Please go ahead.

Speaker 8

Thanks so much, team. I just want to go back to Arun's question on deleveraging. As you think about The optimal capital structure, is 2x net debt to EBITDA still the normalized way you would think about the business? And Based on the visibility you have on cash flow, when do you think you'll be in a position to hit that target?

Speaker 3

It's a good question, Neil. Is 2x the right level? You could argue It's a good level throughout the cycle. Now in an upcycle with the cash you generate, the excess cash, We would probably be happy to go below 2 times, and it will give us the required flexibility, as I said, To look at growth, additional growth opportunities and potential incremental shareholder returns. So we may not stop at Two times, we can take this as an intermediary step and we Two times will just be an average throughout the cycle, I think is the right level.

Speaker 8

Yes. The follow-up is Just on the digital business, you spent a lot of time talking about it on this call, but do you think the company will ever get credit For the digital business, which is highly valuable, terrific margins embedded within a more volatile services and technology business, Does that asset ultimately belong outside of your core business? And I look at Emerson and Aspen, the transaction that they recently did to try to put a better marker on the value of digital. It's a high level question, But I'm curious on what the optimal way to showcase the value of that business is.

Speaker 2

So first, we will continue to pursue. We have made investment into Digital platform, we are using it both internally and externally. We have critical customer that depend upon us And we'll continue to trust us for the future. So we are using it to accelerate our growth, be accretive on our growth and our returns. And whether we are getting the right value, I think it's up to you To review and give us the multiple expansion that we deserve for this, I think we have been so far demonstrating Enough margins sustained margin to this.

Speaker 2

We anticipate the growth to now come to play visibly in the coming years. And I think our leadership in this is recognized. And yes, I will expect that this will be turning into a premium for valuation.

Speaker 8

Okay. Thanks, guys.

Speaker 2

Thank you.

Speaker 8

Good morning, Jason. So Go ahead, please.

Speaker 2

I believe it's time to call. I'm not sure that we have time for another question.

Operator

No further time. You may conclude.

Speaker 2

Okay. So thank you very much. So I would like to conclude the call, and I would like to leave you with few key takeaways. First, During the Q1, our growth momentum was sustained both internally internationally and in North America and drove peer leading Margin expansion reflecting our operating leverage, advantaged market position and increased technology adoption. We also generated sizable free cash flow, And our differentiated technology and digital portfolio are increasingly resonating with our customers and have resulted in sizable awards during the quarter across Middle East, Offshore and in Gas Development in Parquival, all critical markets as the upcycle unfolds.

Speaker 2

Thirdly, we are confident that the momentum of this upcycle will continue, Allowing us to close this year with another quarter of revenue and earnings growth, resulting in full year sequential growth internationally and pro form a North America And full year margin expansion on the high end of our guidance. Finally, with the backdrop of strengthening demand in the energy markets, The macro conditions are increasingly set for an exceptional multiyear growth cycle unfolding broadly during 2022, both internationally in North America and Ladies and gentlemen, I could not be more satisfied With our strategic execution progress to date, the enthusiasm of our entire team and deliver the trust of our customers, I look forward To the coming quarters with increased confidence, our returns focused strategic execution has created the conditions for unique outperformance in our core and digital offering At the onset of this upcycle, whilst elevating our sustainability commitments and accelerating our new energy strategic initiatives. Thank you very much.

Operator

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

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Earnings Conference Call
Schlumberger Q3 2021
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