Schlumberger Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
April 22, 2022

Key Takeaways

  • Q1 results delivered 14% year-on-year revenue growth and operating margins at their highest first-quarter level since 2015, driven by strong Well Construction and Reservoir Performance performance globally.
  • For Q2, Schlumberger expects mid-single-digit sequential revenue growth and 50–100 basis points of margin expansion, while full-year guidance remains mid-teens revenue growth with adjusted EBITA margins exiting the year at least 200 basis points higher than Q4 2021.
  • The firm sees an energy upcycle underpinned by elevated commodity prices, renewed focus on energy security and supply diversification, capital discipline and accelerated digital transformation, which it believes will be stronger and longer than previous cycles.
  • Production Systems revenue fell 9% sequentially due to supply-chain bottlenecks and higher logistics costs, but a robust backlog and execution plan are expected to drive accelerated growth in upcoming quarters.
  • Schlumberger announced a 40% increase in its quarterly dividend, reflecting confidence in its ability to generate double-digit free cash flow and maintain a strong balance sheet.
AI Generated. May Contain Errors.
Earnings Conference Call
Schlumberger Q1 2022
00:00 / 00:00

There are 11 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. You may remove yourself from the 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 Vice President of Investor Relations, N.

Operator

D. Madhu Amazia. Please go ahead.

Speaker 1

Thank you, Leah. Good morning, everyone, and welcome to the Schlumberger Limited First Quarter 2022 Earnings Conference Call. Today's call is being hosted from Oslo, following the Schlumberger Limited Board meeting held earlier this week. Joining us on the call are Olivier Lepuche, 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're making today are forward looking.

Speaker 1

These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. I therefore refer you to our latest 10 ks filing and our other SEC filings. Our comments today may also include non GAAP financial measures. Additional details and reconciliation to the most directly comparable GAAP financial measures can be found in our Q1 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 today. In my remarks, I will cover our Q1 results and achievements, followed by our latest view of the market environment and our outlook for the Q2 and the rest of the year, Stephane will then give more detail on our financial results, and we will open the floor for your questions. Considering the global context during the Q1, I'm very pleased with our start

Speaker 3

of the year.

Speaker 2

Secondly, The quarter broadly reflected typical seasonal patterns, except for additional effects of the Russian global devaluation and a more pronounced sequential decline in Production Systems. Year on year, we delivered a strong increase in earnings and revenue growth along with operating margins expansion. Our results were particularly strong in well construction and reserve our performance where we are maximizing our leading market positions, our top tier technology performance and enhanced operating leverage to full effect, both internationally and North America. All divisions and area grew year on year, resulting in 14% overall growth. This was achieved through double digit revenue growth internationally and by fully capitalizing on our North America exposure with 32% revenue growth.

Speaker 2

Operating margins expanded in both North America and in the international markets, and we start the year with the highest first quarter margins since 2015. This establishes an excellent foundation for full year margin expansion ambition. Well Construction and Reservoir Performance, our core service divisions, had very strong momentum to start the year. In addition, we secured several New multiyear contracts and improving commercial condition in a number of geographies and services. Digital integration also posted double digit growth compared to Same period last year with new critical commercial contracts and significant advance of our digital platform strategy with the launch of our first innovation factory North America.

Speaker 2

In Production Systems, our core equipment division. Year on year growth was muted by the impact of Supply Chain and bottlenecks, which have pushed deliveries into sub second quarters. Despite these transitory challenges, I'm very pleased with the quality and size of the backlog and orders secured in the past 12 months. With improving supply conditions, I'm confident that the execution of our response plan with significantly improved backlog conversion, resulting into an accelerated revenue growth dynamic in the coming quarters. In Russia, the onset of the tragic conflict in Ukraine and corresponding sanction impacted the later part of the quarter.

Speaker 2

We swiftly initiated a series of actions to ensure the safety of our people and implement the restrictive measures concerning new investments and technology deployment to our Russia operation. We continue to closely monitor this dynamic situation and remain hopeful for the quick cessation of OCTs. Overall and despite unique challenges, I'm very pleased with the results of the quarter. I would like to extend my thanks to the entire Schlumberger team Successfully navigating these developments and delivering an excellent start to what promised to be a year of solid growth and achieved. Turning now to the macro environment.

Speaker 2

The energy landscape has evolved significantly over the past few months. Recent events have, on one hand, resulting into a change in the pace of demand recovery, while energy security and supply diversification have also emerged as premium global drivers that will shape the future of our industry in addition to decarbonization, capital discipline and digital transformation. The new dimension will have long lasting positive implications for energy investments over the next few years. I would like to share how we see these dynamics developing over the short and long term horizons and more importantly, How this condition will play to Schlumberger's differentiated strength. 1st, in the short term, commodity prices are elevated as supply conditions continue to tighten due to the impact of capital discipline, consistent OPEC plus police implementation and the potential impact of supply dislocation from Russia.

Speaker 2

The industry is responding to this high commodity price environment with accelerated short cycle investment in North America, led by the private producers and a gradual increase in investment by the public operators, albeit compared by capital discipline and bottlenecks in capacity and supply chain. Internationally, short cycle investments are set to accelerate with a seasonal rebound in the 2nd quarter and more strongly in the second half of the year, led by the Middle East and the key international offshore basin. 2nd, Elevation of energy security as a priority will drive further capacity expansion and optionality to deliver more diverse oil and gas supply. This will support additional long cycle development projects, exploration activity and brownfield rejuvenation programs. 3rd, favorable condition for product and services net pricing improvement have clearly emerged and are expanding across both North America and the international market.

Speaker 2

This will be a defining characteristic of this upcycle. Considering the service sector, new found capital discipline and commitment to margin expansion. These improvements Absolutely critical to support returns and investment in capacity that will be needed to deliver on both the short and long term oil and gas supply the world needs. The combination of these effects creates an exceptional sequence for our sector, likely resulting in a cycle of higher magnitude and duration than previously anticipated. Schumacher has led the sector in reinventing itself over the past few years, allowing inclusive industry shifts, Customer needs and increased shareholder value.

Speaker 2

Since launching our performance strategy, we targeted trends that are manifesting today by focusing on the development of feed for basin technologies, some of which are now unlocking much needed energy supplies and by reducing or eliminating GHG emission with our transition technology portfolio and our new end to end emissions solutions. We have also expanded manufacturing capacity in key basins, such as in North America and in the Kingdom of Saudi Arabia to tailor fit for basin technology delivery. In digital, we are enabling transformation in the sector, establishing the industry digital platform Delphi, creating more powerful AI solutions and leading innovation in Autonomy. This advance in digital enablement are improving both customer operations and our own efficiency as we evolve workflows and improve execution with insights from data. Today, Schlumberger is best positioned to capture the benefits of this unique upcycle.

Speaker 2

Given the steady execution of our strategy, breadth of our market presence, Leading technology portfolio and our ability to derive premium pricing for performance execution and value creation for our customers. Now I would like to share with you our outlook for the Q2 and the second half of the year. Sequentially, we expect a 3rd quarter of growth in both North America and the international market. Growth in North America will be led by continued short cycle activity offset by Canadian Spring Breakup. Internationally, the growth will be driven by the seasonal rebound, albeit moderated by the absence of the usual second quarter uptick in Russia, owing to the uncertainty around the overall depreciation, impact of sanctions and customer activity decline.

Speaker 2

Taken together, This will result in global revenue growth around mid single digits for the Q2. We anticipate the operating margins to expand 50 to 100 basis points, driven by further operating leverage and the positive conditions are outlined. In that context, our sequential margin expansion trajectory is set to resume and subsequently strengthened in the second half of the year in line with our full year guidance. Looking further ahead, The second half of the year is shaping up to be particularly strong based on our view of a significant pipeline of customer activity, upcoming product backlog conversion and the growing impact of net pricing. This period of the year is typically the strongest half and 2022 looks to be no exception.

Speaker 2

While the dynamic situation in Russia and the potential reduction in pace of the demand recovery present near term concerns, We believe the continued tightness in supply, elevated community price and supplemental investment intended to diversify oil and gas supply should represent Positive offset for 2022 and beyond. Accordingly, second half growth will be driven primarily by the international markets led by the Middle East and Key Offshore Basin. Indeed, the offshore activity already is growing sequentially and visibly year on year We'll benefit some secular growth in both shallow and deepwater environment as the acceleration of infill drilling and tieback developments will combine with the resurgence of exploration drilling during the summer and with an acceleration of long cycle development projects ahead of 2023. Similarly, the Middle East region will benefit from the combination of reinvestment in short cycle barrels as we approach the end of current OPEC plus agreements and from the commitment to capacity expansion in both oil, pollution and gas development. Additionally, 2022 is set to benefit from higher discretionary spending and higher product sales and year end deliveries as customers secure the necessary capacity for the 2023 growth plan.

Speaker 2

Finally and critically, we anticipate a net pricing impact will further expand in breadth and scale as the year progresses to benefit margin expansion during the second half and become a unique attribute of this upcycle. With this backdrop and despite uncertainty linked to Russia, we believe that the favorable market condition outlined should allow us to maintain our full year ambition of year on year revenue growth in the mid teens and adjusted EBITA margin exiting the year at least 200 basis points higher than the Q4 of 2021. I will now turn the call over to Stephane.

Speaker 3

Thank you, Olivier, and good morning, ladies and gentlemen. 1st quarter earnings per share, excluding charges and credits, was $0.34 This represents a decrease of $0.07 sequentially and an increase of $0.13 when compared to the Q1 of last year. In addition, during the quarter, we recorded a $0.02 gain relating to the further sale of a portion of our shares in Liberty Oilfield Services, which brought our GAAP EPS to $0.36 Overall, our first quarter revenue of 6,000,000,000 decreased 4% sequentially, while pretax operating margins declined 84 basis points to 15%. These decreases reflect the seasonally lower activity and product sales that we typically experience in the Q1. The conflict in Ukraine also had an impact on our Q1 results.

Speaker 3

Although this was largely limited to the effect of the depreciation of the ruble witnessed during the last month of the quarter. While margins were seasonally lower on a sequential basis, they did increase significantly as compared to the Q1 of last year. Pretax segment operating margin increased 2 29 basis points year on year, while companywide adjusted EBITDA margins of 21% increased 94 basis points year on year despite the inflationary factors we are facing. This reflects the strength of our operating leverage, new technology uptake and increasing pricing traction. Let me now go through the Q1 results for each division.

Speaker 3

1st quarter digital and integration revenue of €857,000,000 decreased 4% sequentially with margins declining 3 72 basis points to 34%. These decreases were primarily due to the effects of seasonally lower digital and exploration data licensing sales partially offset by improved contribution from our APS projects in Ecuador following the pipeline disruption of last quarter. Reservoir Performance revenue of $1,200,000,000 decreased 6% sequentially, while margins declined 232 basis points to 13.2%. These decreases were due to Lower activity in Latin America and the seasonal activity reduction in the Northern Hemisphere. While construction revenue of $2,400,000,000 was essentially flat sequentially, as seasonal reductions in Europe, Russia and Asia were offset by strong drilling activity in North America, Latin America and the Middle East.

Speaker 3

Margins of 16.2 percent increased 77 basis points sequentially, despite the flat revenue, largely due to improved profitability in integrated drilling projects. Finally, Production Systems revenue of $1,600,000,000 decreased 9% sequentially and margins decreased 192 basis points to 7.1%. This was due to the effect of lower revenue following the traditionally higher 4th quarter product sales, combined with delayed deliveries and increased logistics costs resulting from global supply chain constraints. These are temporary challenges that we are diligently working to remedy. Once resolved, this will provide favorable upside to our revenue and margins in future quarters as our backlog is solid and we will ultimately return to a normal pace of deliveries.

Speaker 3

Now turning to our liquidity. During the quarter, we generated $131,000,000 of cash flow from operations and negative free cash flow of $381,000,000 Our cash flow generation was seasonally low as a result of the increase in working capital requirements we always experienced in the Q1. In addition to the typical payout of our annual employee incentives in the Q1, we saw lower cash collections following the exceptional accounts receivable performance of the 4th quarter. Our inventory balance also grew due to the product delivery delays in our Production Systems division, but also to prepare for project start ups in the second quarter and for the strong growth anticipated for the rest of the year. In addition, we took the decision to increase our safety stocks and lock in prices on certain long lead items in order to secure supply and hedge against anticipated cost inflation.

Speaker 3

Although it is reflected outside of free cash flow, our overall cash position was enhanced by the further sale of a portion of our shares in Liberty, which generated $84,000,000 of net proceeds. Following this transaction, we hold a 27% interest in Liberty. Our working capital and cash flow will improve each quarter for the rest of the year, consistent with our historical trends, and we remain confident in our ability to generate double digit free cash flow on a full year basis. This will allow us to continue deleveraging the balance sheet and exceed or previously stated leverage targets in 2022. Based on this and the strengthening industry outlook that Olivier described earlier, we announced today a 40% increase in our quarterly dividend.

Speaker 3

The increase will be reflected in our July dividend and will result in approximately EUR140,000,000 of additional dividend payments in 2022 and €280,000,000 on an annualized basis. This will have a minimal impact on our leverage and we will of course Remain focused on strengthening the balance sheet. I will now turn the conference call back to Olivier.

Speaker 2

Thank you, Stephane. I think we can open the floor to the Q and A session. Thank you very much.

Operator

And our first question comes from the line of David Anderson with Barclays. Please go ahead.

Speaker 4

Hi, good morning Olivier. So Everything has happened over

Speaker 2

the past few months Good morning.

Speaker 4

Hi, good morning. How look over the next several years for your international business to be it seemed to be a primary beneficiary here. Guess my question is

Speaker 5

the ramp up of that activity.

Speaker 4

We've seen a lot of NOCs announced contracts, more tenders are on the way. We've yet to really see that material is an We don't have a ton of visibility on that market. I was just wondering if you could just help us understand what's happening on the ground there. It seems like it's just a matter of timing, but Are there any challenges that you're facing with mobilizing equipment and services environment? You're clearly confident it being a second half story.

Speaker 4

Could you just provide a little bit more context into kind of

Speaker 5

how we're getting there, please? Thank you.

Speaker 2

No. Thank you, Dave. So indeed, first to put things in context, I think the international growth has started to be rebounding last year. I think, as you know, year on year in the second half last We have already posted more than double digit growth year on year in the second half. You can see that On this quarter, we're already at 10% growth year on year and the majority of our international geo unit actually posted double digit and quite a few above 20% year on year.

Speaker 2

So clearly, the momentum of activity pickup internationally has Being initiated and it's not only short cycle, it's short and long cycle as some FID have already been signed last year and more are coming in the way. So now looking ahead, I'm trying to understand how this is hedging in the future. I think first, there is a dynamic Of coal and international supply that will continue to happen as the demand recovery is happening and as the market is looking for energy security and hence diversification of supply. So international basin at large will benefit Secondly, you have the dynamic of short cycle response to the tightness of As we face today and we will face for the quarter to come. And this will prompt not only activity upcycle In the second half or this quarter and in the sub second quarter, no the short cycle basins from Middle East to some short cycle activity offshore.

Speaker 2

And it will be supplemented in the second half by an acceleration of the long cycle development. Indeed, we believe that the condition are set for long and short cycle to be contributing at the same time to the supply growth of international market. And long cycle is not only offshore. Long cycle is some Large capacity expansion that national company major are continuing to pursue. And Offshore market will also see the condition of major and international operator continue to expand their investment.

Speaker 2

So we are seeing this happening today. We are seeing this accelerating in the second half visibly as the combination of short and long will benefit international market. And the OPEC plus as you know is ending their quota distribution and at the end of the Q3 and this will unlock So if we were to look at Middle East, Middle East, a few countries have already made a commitment to capacity expansion in 2022 and beyond, and this will be supplementing the short cycle investment. Offshore, you have seen some FID Approval, you have seen some exploration drilling resuming even last quarter that would just turn into FID and into subsea and deepwater activity uptick in the second half and furthermore in 2023. So the conditions are set, as I said, for both short and long cycle to contribute to supply from International Basin.

Speaker 2

And we are very well placed To respond to this, considering our favorable market exposure to international market, our market position with L and T and our exposure to both Major and independent in Tuki Basin International.

Speaker 4

So Olivier, on the offshore side, you highlighted a number of numerous offshore awards in the release It covered seemed to cover most regions. This is typically been a very highly margin accretive business to Schlumberger. I was just curious, how How much of

Speaker 5

this is related to the events of the

Speaker 4

past few months? Are you seeing projects starting to accelerate? I would think you start to see a lot more on the short cycle You're talking about short versus long. I would think maybe short cycle activity is accelerating because of this. Is that true?

Speaker 4

Are you starting to see that materialize?

Speaker 2

No, I will comment in two sides. First, offshore markets remain very relevant to many of our customers internationally. Very relevant. Why? Because the economics of offshore market, both shallow and deepwater, have improved a lot in the cycle.

Speaker 2

Secondly, many of these offshore reserves, they will place from a carbon footprint. And I think this is something that plays again to reinvestment and expansion. And third, I think the technology, the integration capability and digital have made offshore operations more efficient, more effective, Have an impact on short cycle offshore, infill drilling, tieback with huge technology Different session we have there and exploration near field exploration on one hand And secondly, shorter long cycle. That is a characteristic that we will see accelerating As the major under IOC and some NOC that have unique basin advantage basin, we want to accelerate Derif ID and want to accelerate the execution of Derif ID for contributing supply. And again, integration capability, Technology for performance impact and digital will all combine to make this a reality.

Speaker 2

So yes, we have already seen the impact of this and is only set to accelerate. And we'll not necessarily link to the event happening in the last few weeks. The last few weeks event will have the consequence of Diversity of supply and security of supply. And this will favor offshore basins as one of the basins that can contribute to the long term Supply security.

Speaker 4

Much appreciated. Thank you.

Operator

Welcome. And Next, we have a question from Chase Mulvehill with Bank of America. Please go ahead.

Speaker 4

Hey, good morning, Good morning, Olivia. Good morning.

Speaker 2

So one

Speaker 4

of the follow-up on Dave's question here on the international side. I mean, obviously, It appears that this international recovery is going to exceed last cycle recovery. So maybe I don't know if you want to Take a moment and kind of talk about how this will impact pricing and margin. I mean, I was actually just digging through some old models and looking at 2,006, 2007, 2008 margins. And obviously, the industry margins back then were much, much better than they were last cycle.

Speaker 4

So what do you think it would take for the industry to really get back and move towards those 2006, 2007, 2008 margins.

Speaker 2

I think the commission has set for directionally going there, Clearly. And I think you have several factors playing. 1st, the level of activity expansion globally in every basin for every division This is creating the condition for tightness in the capacity of supply of the service supply and the coupon supply. And this condition Extremely favorable for pricing power because our operator, our customer are looking to secure capacity and to secure delivery assurance as they reinvest into their basins, into their favorable assets to secure this participation to this supply market share. So first, the pricing moment, as I said, or the pricing attribute Secondly, I believe that the industry has realized that technology can make a huge impact on performance, on carbon footprint and on digitalization to deliver efficiency that we need to accelerate the cycle and to deliver assurance of delivery of these extra barrels.

Speaker 2

So we believe that we have here the condition for An upside on the technology adoption, an upside on digital transformation of the industry, trying to achieve Operation automation, achieve drilling autonomy in terms of operation and all that will be combined in addition to decarbonization. So we have these trends that are new that will augment the mix effect that this market is giving us today. We have a favorable mix, international and the decorative offshore mix. You have a favorable pull and stretch on capacity of the industry with significant discipline on this side of the industry that will lead to pricing expansion. And finally, you have this adoption of digital, Adoption of decarbonization and adoption of any fit for basing performance technology that can make an impact to deliver because the industry wants to deliver and participate fully to the cycle.

Speaker 2

So that's the reason why we are positive on this cycle.

Speaker 4

Okay. If I could follow-up quickly, you started to talk about digital a little bit. I mean, there's obviously tightening supply chain, you've got emerging You've got accelerated international growth over the next 12 to 14 months. And all this should be pretty positive for digital as the industry kind of searches for ways to do things kind of faster, smarter and harder. So with that said and with that as a backdrop, Have you started to see accelerated digital adoption?

Speaker 4

And if so, what parts of the international market are you really starting to see accelerated adoption?

Speaker 2

No, I think you laid the case very well. I think digital will be an attribute of Efficiency, performance and transformation in this cycle, no doubt. Everybody recognizes it and everybody is investing towards participating to this digital transformation. We believe with our platform strategy, we have studied the most compelling offer to the market, and we have We've been building, as you heard before for the last 3 to 5 years, the foundation of our platform, and we have seen adoption accelerating last year. So year to date, I'm very pleased with the performance the early performance of the year to our digital business out of our Digital Integration division.

Speaker 2

It is already contributing to visible growth year on year. All the metrics that we are internally following, be it the customer adoption of our Delphi, be it the number of users that are using our cloud Delphi capability albeit the number of the scale and intensity of multi cycle of cycle of computing cycle adoption, All these are going sequentially and year on year up. So adoption is happening. You have seen some enhancement have gone during the quarter, and you continue to see adoption translating into contract and into growth Accretive growth for digital. Finally, I think and we mentioned it into the EPR, We have been launching a year ago our Innovation Factory.

Speaker 2

Innovation Factory are our digital collaborative center that we have placed strategically and we just integrated the last one yesterday in Oslo, Norway. And we are using displays to expose our customer to The capability of our platform with AI and machine learning using our partner capability and integrated into Delphi. And the customer realized that we can achieve a lot. We have delivered 200 projects collaboratively with our customers, and the customer understands the power of your platform to its exposure and then come away with the ability to scale for enterprise deployment from this Innovation Factory capability. So This is one other dimension of adoption that we see and as part of our offering to the market.

Speaker 2

So yes, we are convinced this will be accretive to our growth this year And this will be also having a full flow positive full flow of our margin that will support our margin expansion ambition for the full year.

Speaker 5

Okay, perfect. Appreciate the answer. I'll turn it back over. Thanks, Olivier. Thank you.

Operator

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

Speaker 6

Yes, good morning. Olivier, I wanted to get Your perspective on any changes you're seeing in customer spending behavior related to natural gas. We have very strong International and now U. S. Gas prices.

Speaker 6

And just wanted to get your thoughts if you're seeing any changes there, particularly given the fact that Russia supplies 155 Bcm of gas to Europe.

Speaker 2

It's a very Very relevant question. I think it's a very topical subject with the operators. And indeed, we are seeing operator Preparing, planning and being ready for accelerating their gas supply to the world market Internationally and in North America as well. I think this is touching all aspects of exploration, development and production of gas. And we are very pleased for exposure, Our exposure in North America and exposure internationally.

Speaker 2

Internationally, as you know, we have exposure in conventional gas. And I think you have seen some recent announcement of renewing contracts in commercial gas in Saudi. You are fully aware of our market exposure in Qatar that we have benefited for the last 2 years that have already grown visibly to commit more LNG train for supply to the world. And you have seen also that we are going to participate fully and we are participating fully into offshore integrated gas development, Similar to what we did a few years back with Zohr in East Mediterranean, we are doing with an asset for fully integrated gas In Turkey, in the Black Sea, where we are taking care of everything from development to the gas facility that will be So we are very well exposed. And finally, on conventional gas internationally in Middle East particularly It's getting significant support for regional consumption.

Speaker 2

And you are fully aware of the contract, very large contract, Integrales contract we have with Ujjafoix in Saudi Aramco. So the exposure we have on gas is unique, Conventional, unconventional, offshore, onshore. So and finally, if I had to add one dimension of technology onto it, I was very pleased. This week, we brought the Board to participate to visit in Norway, and we had the opportunity to visit our Our Center of Excellence for Subsea Processing in Bergen, Norway, where we are manufacturing All of our processing, boosting equipment to serve gas market in deepwater subsea environment and in particular, The subsea wet gas compression that will be deployed for Omen Lunge to extend the life of Omen Lunge Gas Supply to U. K.

Speaker 2

For the long run. So this participate to the energy security. This participate to the gas development production and we are very pleased with our exposure. So we are seeing signal of acceleration commitment and we are very well leveraging that for the future.

Speaker 6

Great. I appreciate that. My follow-up is I wanted to talk a little bit about Cash returns, you increased the dividend quite significantly this quarter. But maybe Olivier Or Stefan, you could talk about the framework you're thinking about future cash returns and how should we be thinking about Further dividend increases from here?

Speaker 3

Look, it's a good question. Thank you. Yes. Based on the market fundamentals we highlighted, we do expect to continue generating significant free cash flow throughout the cycle. If most favorable conditions persist as we currently anticipate, this will clearly allow us to, at the same time, maintain a strong balance sheet, Fund new growth opportunities and look for additional ways to increase shareholder returns throughout the cycle.

Speaker 3

So This can take the form of increased dividend, share repurchases or a combination of both. So as it relates to a framework, We will, of course, provide further details at our upcoming Capital Market Day. But at this moment, we set the dividend at a level we are Comfortable with to allowing us to balance our continuing deleveraging commitments with the overall capital allocation priorities.

Speaker 6

Great. Thank

Speaker 5

you. And

Operator

next we have a question from Neil Mehta with Goldman Sachs. Please go ahead.

Speaker 7

Great. First question Good morning, Jim. Good morning, Jim. The first question here is It's more of a logistical question. I think in the back half of this year, the expectation is to do a Capital Markets Day.

Speaker 7

So one, any update in terms of timing, but secondly, what do you want to achieve at that event? What are the important strategic priorities that you want to discuss with the investment community.

Speaker 3

So on the logistical side, Neil, the Capital Market Day will be Early November and you'll receive the invitation pretty soon. I'll let Olivier comment on the main agenda.

Speaker 2

Yes. The main agenda, as you know, I think will be to achieve 2 or 3 key elements. The first is to lay out our updated view of the mid- and long term outlook for industry and across the engines that we want to participate fully into the core of the digital and new energy and as such document our view of the market scenario and the way our Play will expose us to fully participate in each of these 3. The second, obviously, will be to articulate the level of our strategy That will make you understand the tangible progress we have made, the critical milestones we'll meet by 2025 or by 2,030. And finally, we'll document, I will say, our financial ambition and financial and capital framework to support this ambition of our strategic cushion for the next 5 years and with the long horizon of 2,030 for our target.

Speaker 2

So that's what we are aiming to achieve during this Capital Market Day.

Speaker 7

Thank you, sir. We look forward to it. And the follow-up is, Can you talk about your exposure to the increased CapEx here at Saudi Aramco and ADNOC? And how you see that trickling across your segments? Where do you expect expanding to increase significantly here across what business lines?

Speaker 2

I think generally speaking, I think it's not only Saudi Aramco and or Saudi and UAE, I think it's the GCC Country and includes PIRAC as well, I think that are set for a significant rebound in both short cycle to respond to the Unlocking the quota at the end of the year and then long cycle with capacity expansion commitments that several countries have made. So we expect the consequence of that will be first in the second half of the year activity will start to see an uptick in the form of short cycle and that will affect both reservoir performance well construction. And we will see also this expanding into Offshore and onshore capacity expansion more into 2023. As you know, several contracts have been put in place to support this capacity expansion by this operator with us and the industry at large. And this will see an acceleration of investment In 2023, that will expand beyond the short cycle visibly into this new development, new capacity Beyond what is happening today on gas and commercial, what is happening today in some of the integrated contracts we already own.

Speaker 2

So it will be Widespread, I would say, and across the whole division as we move into 2023.

Speaker 7

Thanks, guys.

Operator

Thank you. Next, we have a question from Scott Gruber with Citigroup. Please go ahead.

Speaker 5

Yes. So I want to touch on the new energy outlook here, just given now that the macro has changed. Obviously, valuations and new energy have come down and your cash flow outlook has improved. So does that mean that in the years ahead, we could expect Schlumberger to be investing a bit more aggressively in new energy? Or With a better outlook for the core, is there less urgency to build out the new energy business?

Speaker 5

How should we think about that?

Speaker 2

No. It remains our new energy remains a critical strategic pillar of our long term strategy. So we are set to continue to invest into the venture we have created. We are making tactical move and strategic move to accelerate organic and inorganic investment. And we continue to monitor the market and continue to edge and grow our exposure to this.

Speaker 2

So The market conditions that have slightly changed in the last few weeks do not change our view On the new energy outlook, we are even seeing some reinvestments, and you have seen this during the quarter, Into geothermal as an alternate source of energy, you have seen that geoenergy being through the CECLIS Energy venture that we have Credit was is a domain that was indemnified by EU, the European Union, to be invested into to substitute gas and hence to lessen the dependency on single source of supply on gas. And I think you can certainly anticipate and see that CCS at large is going as an opportunity for all industry and for us as we work not only with industry as you have seen the announcement We have made with Petronas, but also we are working beyond the industry as you have seen previous engagement we have and continue to do so. So I think we continue to develop and mature the technology ready for scaling them, and we continue to make organic investments and securing inorganic opportunity to augment our capability into that space.

Speaker 5

And you started to touch on my follow-up, which relates to the commercial opportunity and how that developed here going forward. And it does seem like geothermal is going to get a pull here. But can you speak to the other commercial opportunities and how you think those evolve, particularly from a timing and cadence perspective, given the backdrop? The course opportunity materialize more quickly across carbon capture and hydrogen electrolyzers? I think

Speaker 2

We have been commenting on this before, and I think we'll provide a very comprehensive view at our Capital Market Day. And I think the biggest and long term bigger potential is both on CCS and hydrogen market, we believe, 1st and foremost. And believe that the energy storage, including medium processing or extraction as well as energy stationary energy storage as well as geoenergyothermal Certainly, a shorter term and mid term opportunity that we'll not miss to secure. But we'll come back with more detail and more of a better framework for you to understand our ambition there.

Speaker 5

Looking forward to it. Thanks for the color.

Speaker 2

Thank you.

Operator

Next, we go to Conor Lina with Morgan Stanley. Please go ahead.

Speaker 8

Thank you. Good morning. Good morning. I wanted to ask about Good morning. Thank you.

Speaker 8

I just wanted to ask about The potential recovery in the back half and particularly OPEC, you were alluding to the cessation of the supply agreement. I guess one thing that surprised us is while there have been some countries that have fallen short of their production targets, OPEC as a group has been able to raise production fairly significantly, and there hasn't been as significant increase in the rig count. I appreciate not all activity is captured in the rig count, but Has that surprised you? And when do you think we see a sort of catch up? Do we need to return to 2019 activity levels to get to 2019 production levels?

Speaker 2

No. First, I think that OPEC plus indeed has been very strict into implementing the policy and the respect of the quota. 2nd, I think we have a very few exceptions. The GCC has been able to indeed unlock this production without significant at this moment, Significant increase in short cycle activity to support that increase. This will transition into a necessary investment Supporting the sustained capacity in the coming months.

Speaker 2

Until then And until now, it has been that the production of some critical countries were below their sustained capacity potential, hence the need For reinvesting, the need for accelerating investment drilling or intervention was measured and was not necessarily Disproportionate compared to the past, I think you will see that transitioning into the second half and accelerating next year. And it will combine with capacity expansion they have committed to. So there will be a hike in activity On two fronts, the short cycle to this time sustain maximum capacity that is established and an investment that will Expanded this sustained capacity in the future. So that is set to happen. It wasn't necessarily a big surprise to us.

Speaker 2

I think that Middle East was a little bit of behind in terms of activity rebounding internationally until now, but you will see this catching up in the second half and accelerating in 2023.

Speaker 8

All right. Thank you. That's helpful context. Maybe just flipping over to the Russia side of things. I'm curious in your full year revenue growth commentary, what are you contemplating In your Russia operations, are you expecting significant activity declines?

Speaker 8

Could you help us frame what the cessation of New investments actually means for your activity levels in the near term here?

Speaker 2

I think it's obviously an extremely dynamic situation. If you want the sanction of Saudi having an impact on the Russian economy and our operation, we'll not be immune to those effects. Well, it's currently currency fluctuation, as you have seen, or customer activity level today or tomorrow. So and there is also a possibility of further sanction. So The impact of the Q1, as you have seen, was essentially limited to currency depreciation and dilution.

Speaker 2

It's very difficult at the moment to predict What the impact may be in the upcoming quarter concerning the uncertainty. On the flip side, as I've described, the environment That we see and the dynamics we see in the market and the anticipated response to this call for energy security Please claim the commission to offset this uncertainty and set this risk. And also, the decision we have made To suspend new investment will mean that we'll be able to allocate this CapEx to this upcoming opportunity effective this year and hence being able to capture this upside in activity in this dynamic environment. And as you say, should allow us to offset and keep our financial ambition intact.

Speaker 8

All right. Thank you very much. I'll turn it back.

Speaker 5

Thank you.

Operator

And next we go to Roger Read with Wells Fargo. Please go ahead.

Speaker 9

Yes, thanks. Good morning.

Speaker 2

Good morning, Odell.

Speaker 4

I guess I'd

Speaker 9

like to ask 2 questions that are more or less margin focused. The first on production systems, which obviously is lagging for obvious reasons. But If we don't get a strong subsea or offshore deepwater recovery, what else can we expect that would list the production systems margins as we go forward.

Speaker 2

I think there are 2 elements. I think we should really separate here. The first is The transitory or temporary impact we have had on the excessive cost of logistics and delivery Supply chain bottleneck that we have to walk through that had led to temporary costs that I think will over time abate and will reduce as we walk through this supply chain. We have a corrective action plan with diversification of source of supply using different logistics routes and you heard about our commitment to some critical safety stock for inventory to secure Less disruption going forward. So this disruption aside that has had consequential cost, supplementary cost impact, I think we expect this to be more subdued as we go forward.

Speaker 2

We start to accelerate our conversion of our backlog. So what do we need? I think we have already this in the backlog. We have a very big backlog that we have accumulated for the last A few quarters and we keep going. And it's not only Subsea.

Speaker 2

Our production system is made of Subsea, as I mentioned. I think we are very proud of Some of our market position in subsea, including what we have seen in Norway, but also have a completion with a few contracts that we won In the Middle East, in Brazil in particular, Archolift, PCP, pumps that you have seen that we have won just in Kuwait, We're in a very good position. Pollution chemicals that are being put as well and our midstream and surface Come on capability that are fully leveraging, partially surface, the upcycle in North America. So you come out of this. We have not only short cycle exposure with surface in North America with completion after lift.

Speaker 2

We have long cycle with obviously deepwater And some of our long cycle participation into some gas facility, as I mentioned, in Turkey. You combine all this and you have Enough backlog to lift and create an uplift into our growth going forward and actually indicative of pollution system to be accretive to our growth in the second half.

Speaker 4

Thanks for that. That was very helpful.

Speaker 9

The other question I have is a little bit more Far reaching, but as we think about or let me say the base case is, let's assume what's happened in Russia stays as is to sanctions, everything like that through the middle of the decade. Spending other parts of the world is going to have to increase to make up For lost Russian production at a minimum lost Russian growth, if not absolute lost barrels. And I was wondering, as you look at your margins You think about sort of an equal distribution of that spending or that production growth in other parts of the world. Should it be No impact on Schlumberger's margins, a modest positive or a modest negative if Russia becomes a shrunken market and some of these other areas have to grow in response.

Speaker 2

I think I will not try to compare Russia margin with the rest of our portfolio, I think I will look at it from the strength of the cycle, from the lead market position we have And from the starting point we have today, we've having restructured and reset our operating leverage, the exposure of digital, the exposure of an increasing Offshore, long and short cycle mix, I think these are attributes that convince us that our margin will continue to expand. As we have seen this quarter, we had increased year on year both NAM and international margin, and we have been posting The best margins in 2015 and yet despite an impact in the Q1 from Russia. So I think we are looking at it at, as you say, at the big picture. Big picture includes an investment in oil and gas for energy security, A diversification that will have a call on international supply as well as in North America and an increasing mix of offshore and long cycle as capacity needs to be expanded and the reserves that have been depleted Through the last down cycle for the last 7 years, we need to be expanded again.

Speaker 2

So that mix is what make us confident into our trajectory of margin expansion and into the potential uniqueness of this upcycle compared to past and hence the confidence we have in the short and the long term.

Speaker 9

Great. Thank you.

Operator

And ladies and gentlemen, we have time for one last question that's from the line of Ian MacPherson with Piper Sandler. One moment please. And please go ahead, sir.

Speaker 10

Thank you. Good afternoon and Oslo. Just wanted to wrap up. Olivier, I wanted to ask Directly, what is your view of the production trajectory for Russia assuming the sanctions or what we see today. I know that you don't want to be too specific with regard to the cadence of your impact over the course of this year, but Do you subscribe to the idea that at best Russia pivots from a steady grower to a steady decliner under The current sanctions

Speaker 2

regime? I think I cannot be speculating on this And the market condition, I think you see the same numbers as we do see. You see that there is, as I said, a potential risk of Russia supply dislocation. I think what is important is that the demand trajectory that is recovering and is set to further increase next year compared to previous prediction, not Not only to offset that, but to also respond to the market, I think, will be contributing to overall growth. So it's very difficult to predict.

Speaker 2

I think we are this is a very dynamic situation, and we are not here to speculate on a dynamic situation. We know that we have to account for assumption that it could be a demand dislocation, there could be a demand supply disruption from the Russia source of supply. Hence, we know and we have seen our customer rotating and starting to anticipate and position themselves for participating to the current supply that will happen from the second half of this year and the years to come. So That's the only thing we can come up on.

Speaker 10

That's a perfectly fair answer. But maybe put otherwise, how critical Would you say that Schlumberger and your Western OFS peers are relative to the domestic Russian OFS Industry with regard to their ability to lean on internal OFS resources as opposed to Western Technology and Kit.

Speaker 2

No, again, we cannot speculate on this. I think we Our first and foremost priority is to look after the safety of our people everywhere we operate, including Russia, And to comply, we've done most diligence to the sanction international sanction that are in place. To speculate about what were the consequence of the sanction Onto the Office Industries, Russia, I think it's something that the future will tell us what is happening, but I think I don't want to be in a position to come out on this at this moment.

Speaker 10

Fair enough. But thanks for all the other answers today. I appreciate it.

Speaker 2

Thank you very much. I believe that it's time to close this call. So in conclusion, I would like to leave you with 3 takeaways. Firstly, our Q1 financial results represent a strong start to what promised to be a significant year for the company. In particular, the resilience and strength of our core service division and the full participation in the fast growing North America market have contributed to a very for the year on year growth and margin expansion.

Speaker 2

Secondly, the activity outlook is shaping up favorably as 2022 progresses and is set to support our full year mid teens growth ambition despite the uncertainty on our Russia operations. Furthermore, in the later part of the year, We gain from improving market conditions, favorable activity mix in key offshore basins and in the Middle East and broader net pricing impact across North America And international markets. Our confidence in the favorable market conditions and our midterm outlook supports our margin expansion and our commitment to generate double digit free cash flow. As a result, we have decided to accelerate cash returns to shareholders to a visible increase in our results. Finally, we believe that the consequences of the current crisis will reinforce the market fundamentals for a stronger and longer upcycle as a priority on energy security will favor reinvestment in oil and gas supply.

Speaker 2

Consequently, The outlook for the next few years is improving and absence of global economic setback should translate into an exceptional sequence for industry. Thank you very much.

Operator

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

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