Olivier Le Peuch
Chief Executive Officer at Schlumberger
Thank you, ND. Good morning, ladies and gentlemen. Thank you for joining us on the call.
In my prepared remarks today, I will cover three topics: our third quarter 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. Stephane will then give more details on our financial results, and we will open the floor for questions.
The third quarter results further emphasize our returns focus, consistent execution, and the advantaged mix of our portfolio. Growth momentum was sustained, and we delivered a fifth consecutive quarter of margin expansion, achieving the highest pretax operating margin since 2015 and cash flow from operations in excess of $1 billion.
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 Reservoir Performance where we fully seized the sequential growth opportunity, driving operating margins in both these divisions above mid-teens, the highest levels in the last three years. Revenue quality improved, boosted by favorable activity mix and higher new technology uptake that delivered strong margin expansion.
Second, internationally, we recorded growth in all three areas, with revenue up 11% year-on-year, consistent with our ambition of double-digit revenue growth compared to the second half of 2020. International margins 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 disruptions. Margins also continued to expand, with operating margins firmly at double digits.
Finally, we are pleased with the very sizeable activity pipeline secured during the quarter, through competitive tenders, direct awards and contract extensions, 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.
We are delivering on the promise of our performance strategy, which is increasingly impacting our top- and bottom-line results, both in North America and internationally. As the cycle accelerates, we'll leverage our advantaged platform to capture the exciting growth and outperform the market in our core going forward.
Moving to Digital: We continued to progress our platform strategy this quarter, expanding our offering through the acquisition of Independent Data Services and a strategic investment in DeepIQ to further advance our digital technology offerings 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 solutions to the field, complementing our Agora platform and Sensia solutions.
And in digital drilling, we successfully completed the first fully automated section drilled offshore at the Hebron platform for ExxonMobil in Canada, as you have seen in this morning's earnings release. This achievement is 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 solutions accelerate in our industry. And whilst we are in the early innings, we are excited about the prospect of transitioning the majority of our software customer base, of over 1,700 companies, to our digital platform during the next few years. This growing adoption will generate an expanding set of digital revenue streams over a long horizon, as we transition every customer to new digital solutions for their data, workflows and operations.
Moving to New Energy: We advanced our portfolio by taking a position in stationary energy storage through our strategic investment in EnerVenue, a company with differentiated metal-hydrogen battery technology. This represents a new opportunity set and an expansion of total addressable market in a sector with significant growth opportunities.
In geoenergy, following the success of the pilot in our technology facility in France, Celsius Energy has secured five 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.
To conclude on this quarter's 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 efforts to create enduring value for our customers and our shareholders.
Now, I would like to turn to the near-term macro and the growth opportunity ahead of us.
The market fundamentals have improved steadily throughout 2021, especially over the last few weeks, with oil and gas prices attaining recent highs, inventories at their lowest levels in recent history, a rebound in demand and encouraging trends in the pandemic containment efforts. These strengthening industry fundamentals, combined with the actions of OPEC plus and continued capital discipline in North America, have firmly established a prospect of an exceptional multi-year 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 paces, across different basins, operating environments and customer groups, resulting in a sustained, multipronged growth cycle. Our broad exposure across these different dimensions puts us in an advantaged 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 has 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%, with broad 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 tender awards, as detailed in our earnings release, strengthens our market position, and with our strong presence and commitment, we will benefit the most from this exciting outlook in the region.
In the offshore markets, we are also set for a strong resurgence this cycle. Rig activity grew for the third sequential quarter internationally and is expected to build on the notable increase in development FIDs in the coming years. Advances in new technology, digital and integration are driving performance impact offshore, from discovery to well construction, production and recovery, and are creating the conditions for offshore operators to reinvest with confidence in this cycle.
In 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 operators capitalize on the advantages of this prolific basin and its existing takeaway infrastructure and extract more value from their core upstream positions through exploration and tiebacks.
Taking these factors together, a broad offshore resurgence will result from IOCs building on their advantaged hubs, independents fast-tracking development of their recently acquired assets and NOCs unlocking their gas and oil reserve recovery potential. Our technology, digital enablement and integration capabilities are critical advantages in this market environment and are resulting in significant new contract awards, both internationally and in North America.
Finally, we are extremely pleased with customer reception of our Transition Technologies portfolio, and the accelerated adoption of these technologies that reduce the carbon impact of oil and gas operations. This portfolio is focused on fugitive emissions, flaring and electrification, and is already helping customers decarbonize operations, advancing our net-zero ambition and strengthening our sustainability leadership in the industry. Some examples of this impact are cited in our highlights.
Turning to the fourth quarter outlook:
Directionally, we anticipate another quarter of growth, with an ambition for growth across all divisions. Growth will be led by Production Systems and Digital & Integration, benefiting from a year-end sales uplift, tempered by typical seasonality in Reservoir Performance and Well Construction. This should result in an overall sequential growth rate similar to the prior quarter.
With this fourth quarter outlook, we expect to reach our double-digit international growth ambition for the second half of 2021, when compared to the second half of 2020. It will also translate into full year revenue growth, both internationally and in North America, after adjusting for the effect of divestitures.
Building on third quarter operating margins at recent highs, our ambition is to sustain this level of margin performance in the fourth quarter. Consequently, on a full year basis, we remain confident in attaining the high end of our guidance of 250 bps 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 views on 2022.
Against the backdrop 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 absent of setback in economic and pandemic recoveries, we anticipate very strong global upstream capital spending growth. This growth will impact all basins, every operating environment, short- and long-cycle activity and all customer groups.
In 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 low- to mid-teens, 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 positioning and are now biased to accretive growth onshore and will benefit from strong growth offshore in the Gulf of Mexico. And in the international markets, we have built a multiyear pipeline of strong activity in the most prolific basins that will lead the supply 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 levels since 2015, which, combined with the favorable market position I've just described, is an excellent platform for margin expansion. Internationally, we are also set for peer-leading margin expansion, as we exit 2021 with margins above pre-pandemic levels. The combination of strong activity growth and operating leverage will support durable margin expansion.
Additionally, through our Fit-for-Basin and Transition Technologies, and capacity tightening, we see favorable conditions for broader net pricing net gains in the coming year, in both North America and the international markets.
Finally, as a result of our digital platform strategy and growing customer adoption, we anticipate an acceleration of our digital journey, resulting in accretive revenue and earnings growth.
Consequently, we expect margins to expand further in 2022, supporting material earnings growth potential and are 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 will now pass the call to Stephane.