Schlumberger Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
October 21, 2022

There are 12 speakers on the call.

Operator

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

Operator

D. Madhuamezia. Please go ahead.

Speaker 1

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

Speaker 1

These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. I therefore refer you to our latest 10 ks filing and our other SEC filings. Our comments today may also include non GAAP financial measures. Additional details and reconciliation to the most directly comparable GAAP financial measures can be found in our Q3 press release, With that, I will 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, starting with our Q3 results and our latest view of the macro environment. Thereafter, I will conclude with our outlook for the remainder of this year.

Speaker 2

The second half is developing to be one of the most exciting times for the company in the recent past. We started with solid results led by the international market, and we continue to execute at a very high level, delivering another quarter of double digit revenue growth with earnings per share and EBITDA at their highest level since 2015. In addition to the details captured in our earnings release this morning, I would like to take a moment to reflect on some of the key highlights for the quarter. To start, year on year revenue growth accelerated to 28%, the highest growth Since 2011, more than a decade ago. Internationally, all our revenue grew and the pace of growth increased to 13% sequentially 26% year over year.

Speaker 2

Activity and revenue trends confirm the onset of another phase in the global growth cycle, one That will be increasingly driven by the international and the offshore markets. Through our breadth and technology integration, we are Positioned to benefit strongly from the acceleration of activity that is expected in the quarters and years ahead. In our core, all divisions continue to execute very well and the impact of operating leverage and improved net pricing was reflected in our results. All divisional and our core posted margin expansion led by Well Construction, our biggest division, which posted over 400 bps sequential improvement. We also held our digital forum in Switzerland, bringing together captains of Industry in Energy and Information Technology over 1,004 leaders, partners and customers.

Speaker 2

This year's forum was our biggest yet and marks an inflection point for digital. Our long term competitiveness as an industry depends on our ability to effectively harness technology, data and deeper collaboration. During the 3 days of active engagement, it became increasingly clear to all participants that through digital, we enter the future better equipped to deliver higher value in terms of performance and decarbonization. In parallel, we also continue to strengthen our core portfolio, increasing our opportunity set In the Creative Offshore Markets, we announced an agreement to form a joint venture with Aker Solutions and Subsea 7. This agreement and meet their decarbonization goals.

Speaker 2

In the core and in digital, our technologies are increasingly being adopted and are positively impacting our customer performance. Secured several significant multiyear contract wins during the quarter and continue to build a solid pipeline of activity for the future. And finally, in New Energy, we continue to make significant advance building partnerships, investing and developing new capability. We announced an agreement with RTI International to accelerate the industrialization and scale up of innovative non aqueous solvent CO2 capture technology. We also made an investment in Zek Power to accelerate the development of technology for clean hydrogen production from natural gas.

Speaker 2

Both of these are advancing our road map for hydrogen and CCUS. Recent policy decisions in the U. S. And Europe are supportive for selected New Energy Domains, technology led approach and market growth opportunity. We expect to announce additional progress in the coming weeks months as we continue to position the company for long term participation across the entire energy value chain.

Speaker 2

To sum up, we entered the second half of the year with expectation for strong growth momentum and raised our revenue guidance for the full year. This Was predicated on a robust international outlook, the strengthening of offshore activity and the broadening impact of service pricing improvement. I'm very pleased with the evolution of these dynamics and our execution thus far, both of which continue to result in differentiated operational performance and solid I would like to thank the entire Schumacher team for delivering another exceptional quarter. Turning now to the macro. We have strengthened our view in a multiyear upcycle as we are on the cusp of yet another year of growth.

Speaker 2

Despite concerns Over the slowdown of global growth rates and the potential for recession, the fundamentals of energy as a critical resource remain very constructive. 1st, in the near term, a seasonal uptick in demand as winter approach is pitted against a very intricate supply landscape for both oil and gas To the end of the year, this situation is exacerbated by the ongoing energy crisis in Europe. Looking further out Into the horizon, the demand supply picture remains delicate, with this imbalance amplified by geopolitics, increase in stance of Supply disruption and limited spare global capacity. 2nd, the growing necessity of energy security and supply source diversification We'll also bring or also drive urgent increase in energy investments. A significant step up in investment is required to create Supply redundancy, rebalance market and rebuild global spare capacity to levels that provide for sustainable economic growth.

Speaker 2

And 3rd, with our OpEx plus decisions and the extension of its framework for cooperation through 2023 are additional factors that will enable Operator to invest with a higher degree of confidence in their commodity price assumptions. Taken together, these dynamics will result in a supply debt upcycle, characterized by resilient upstream investment that is decoupled from near term demand volatility. We expect investment growth will be durable, reinforced by the long term demand trajectory, multiyear capacity expansion plans, Lower operating breakeven price and supportive commodity prices. Growth will be simultaneous in North America And in the international markets, this started first in the North America market and we are already witnessing the next phase of growth with an acceleration In pace, in the offshore and international markets, that was very visible in the Q3. In the U.

Speaker 2

S. Land markets, We are participating more profitably in a more accretive and lower capital intensive market segment where our technology, performance premium And our Technology Access business model are driving solid revenue and margin growth. In the International and Offshore markets, We have increased market access and enhanced our participation across the value chain through a combination of portfolio actions, fit for base in technology and higher wallet share on account of our performance and integration capabilities. The next phase of global market inflection Is expected to be driven by increasing activity in the Middle East. Looking ahead to the Q4.

Speaker 2

We expect another quarter of sequential revenue growth EBITDA margin expansion to close the year. Sequential growth will reflect historical seasonal trends. The international markets will be driven by a sequential uptick in the Middle East activity as capacity expansion projects begin to mobilize. Global Offshore activity will continue to strengthen, offset by the approaching seasonality in the Northern Hemisphere, while North America land activity expected to moderate its growth trend. This combination will result in 4th quarter year on year revenue growth in the mid-20s And 200 bps EBITDA margin expansion when compared to the Q4 of 2021.

Speaker 2

Against this backdrop, we will visibly surpass our previously raised revenue guidance for the full year. This updated outlook These are across our 3 engines: the core, digital and new energy. Constructive oil and gas market fundamentals, energy security The need to accelerate the energy transition will support increased investment in both clean energy, technology development and lower carbon oil and gas production. We have positioned the company to outperform in the long term with multiple technology led opportunities across the entire energy value chain. This opportunity cover Oil and Gas, Industrial Decarbonization and New Energy Systems, all supported by digital transformation.

Speaker 2

We are ready to apply our technology, global scale and industrialization capabilities to lead in this energy landscape and deliver outstanding value for our customers and shareholders. And finally, we will hold our Investors Conference in New York in a couple of weeks, Well, I look forward to seeing most of you. During this event, we'll articulate our ambition for the future, including our near term growth for 2023. As part of this year's Investors Conference, you will also have an immersive opportunity to see and touch some of our exciting new technologies and meet With members of our expanded management team, I'm truly excited about this upcoming event. I will now turn the call over to Stephane.

Speaker 3

Thank you, Olivier, and good morning, ladies and gentlemen. 3rd quarter earnings per share, excluding charges and credit, was 0.63 dollars This represents an increase of 0.13 dollars sequentially and 0 point 2 $7 when compared to the 3rd of last year. This was the highest quarterly earnings per share, excluding charges and credits, since the Q4 of 2015. Overall, our Q3 revenue of $7,500,000,000 increased 10% sequentially. We witnessed a clear acceleration of growth during the quarter, as evidenced by the 28% year on year revenue increase.

Speaker 3

Consistent with our expectations, activity shifted towards the international markets, particularly offshore. As a result, we experienced international sequential revenue growth of 13%, which significantly outpaced North America. Although we experienced volatility in certain foreign currency exchange rates across the world, The overall net effect on our revenue was negligible, both sequentially and year on year. Turning to our profitability. Pretax segment operating margins expanded 161 basis points sequentially to 18.7 percent and adjusted EBITDA margins increased 91 basis points to 23.5%.

Speaker 3

Margins also increased significantly as compared to the Q3 of last year, with pretax segment operating margins 320 basis points year on year, while adjusted EBITDA margins increased 133 basis points. This significant margin expansion illustrates the benefits of the operating leverage and pricing momentum we have, as well as our ability to manage inflationary headwinds. Let me now go through the Q3 results for each division. 3rd quarter digital and integration revenue of €900,000,000 decreased €55,000,000 sequentially, While margins were down 586 basis points to 33.9%. The effect of increased digital sales was offset by the absence of €95,000,000 of exploration data transfer fees that we recorded last quarter.

Speaker 3

Reservoir Performance revenue of $1,500,000,000 increased 9% sequentially, while margins improved 209 basis points. These increases were driven by higher intervention and stimulation activity, both on land and offshore. Well Construction revenue of €3,100,000,000 increased 15% sequentially, driven by strong activity growth, both internationally and in North America, as well as improved pricing. Margins expanded 403 basis points to 21.5 percent Due to higher offshore activity, a favorable technology mix and solid pricing improvements. Finally, Production Systems revenue of $2,200,000,000 increased 14% sequentially, primarily driven by higher product deliveries backlog conversions as supply chain logistics constraints continue to ease.

Speaker 3

The revenue increase was led by international markets, which grew 17% sequentially. As a result, Margins returned to double digits, increasing sequentially by 142 basis points to 10.4%, Their highest levels since the Q3 of 2019. Now turning to our liquidity. During the quarter, we generated €1,600,000,000 of cash flow from operations and free cash flow of €1,100,000,000 This performance represents a significant improvement compared to the first half of the year as working capital started to unwind during the quarter despite the sequential revenue growth. Consistent with historical seasonal patterns, We expect this trend to accelerate in the 4th quarter, resulting into free cash flow improving sequentially.

Speaker 3

During the quarter, we made capital investments of just over €500,000,000 This amount includes CapEx and Investments in APS Projects and Exploration Data. For the full year of 2022, we are Capital investments to be approximately $2,200,000,000 as we continue to support very strong revenue growth, particularly in our Well Construction and Reservoir Performance divisions. Net debt improved by €1,300,000,000 during the quarter to end at €9,700,000,000 This level of net debt represents a $2,700,000,000 improvement compared to the same period last year. Our net debt to EBITDA leverage is now down to 1.6 times and we expect it to drop even further during the Q4 on a combination of higher earnings and improved free cash flow. I will now turn the conference call back to Olivier.

Speaker 2

Thank you, Stephane. And ladies and gentlemen, I

Speaker 4

think we are ready for the Q and A session.

Operator

Our first question comes from the line of James West with Evercore ISI. Please go ahead.

Speaker 5

Hey, good morning Olivier and Stephane. Good morning.

Speaker 2

Good morning, gents.

Speaker 5

So Olivia, I wanted to touch on the biggest business right now, which is your core and the fact that it's Strengthening so significantly, but it's also the core has changed over the last several years. And I'd love to hear kind of your thoughts on Now the next maybe not the next quarter, but the next couple of years should play out for the core business given where this cycle is going, how it's Internationally, how it's heading offshore and how Schlumberger has positioned itself for where the increased capital spending will be?

Speaker 2

No, I think I would like to comment qualitatively on the strength and the power of the core. 1st and foremost, I think it's built on the 2 critical foundation. 1 is performance. Performance matters in this industry and performance give us differentiation. And I think here from our technology reliability, from the competency of our people and the way we Remote digitally control and monitor operation, we are leading and we are recognized as such in the industry.

Speaker 2

The second is customer intimacy. Customer intimacy coming from the geographical basins and engagement we have that give us opportunity to deliver this feed for basin technology that are creating a unique differentiator and creating loyalty with our customers. So When you combine this and we have done that for decades, but I think when a market comes with higher revenue intensity in offshore market And in unique projects where integration matters and technology makes an impact and create value for the customer, we see more adoption of our technology. We see more market share consolidation and we see and recognize more pricing premium. So we see this trend Our portfolio, the high grading we did in North America to tune the portfolio to be fit and focus on the capital light And technology differentiation and this combined with international footprint and strengths we have retained, I think give us a A unique set of benefits as the market continue to unfold going forward.

Speaker 5

Okay, great. That's very helpful Olivier. And then maybe a follow-up for me on the digital side of your business. Obviously, Successful forum in Luzerne recently. I got to have my own kind of takeaways, I guess, From the event and the things that were announced during the event, but I'd love to hear kind of your takeaways of The level of success, how you think it went, how you see the adoption playing out at digital?

Speaker 2

I think it was obviously, as we said, not only the biggest yet, but the most successful yet event on the back of multiple factors. The first, The quality and level of the audience that did participate to this on both our strategic partners and our customers that made the effort to attend and engage And all agreed that this event was a defining moment for them and the belief for industry As it created an inflection point in recognizing the value of digital in performance impact, in decarbonization

Speaker 6

And in

Speaker 2

efficiency going forward for the industry, building as a factor of resiliency and performance for long term for the industry. So I think that's the highest Take away now. The other key benefit we have is and we have is that we had Further acknowledgment from the customers that were attending and for the customers that were watching, while I was asking that our platform is and our ecosystem with The partners we have created around our platform is becoming very mature And it's delivering value and has already been proving its worth for many, many customers. So The buzz around the success of the platform and the value from subsurface to surface The remote operation or digital operation has been recognized and this will call for more success. So I believe we have an inflection point in the adoption and we are seeing it through the different contracts and you have seen some of them that are coming through In the press release, and you will see more coming in the coming months and quarters that reflect the adoption of scale of our solution.

Speaker 2

And it's not only sub surface, it's not only this domain, it's expanding. It's expanding. And I think the announcement we made With Microsoft to offer an enterprise data solution and the 1st commercial solution on OSDU is making an impact. Similarly, the announcement we made with Faker on the Cognite Data Foundation to expand and provide the only subsurface The operation in Tecate. Ecosystem for workflows and interoperability is unique.

Speaker 2

So the adoption is about to scale. And finally, you have seen that we also announced that the powerful platform has attracted the commitments The collaboration with Saudi Aramco to go beyond upstream and to create a platform for carbon management. So I believe the table is set For success, if I may, going forward and you will start to see this quarter and in the years to come.

Speaker 5

Very good. Thanks Olivier.

Operator

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

Speaker 7

Hi, good morning Olivier.

Speaker 2

Good morning, Dave.

Speaker 7

I wanted to ask you about service intensity. Somebody jumped out in the release to me was You said that international revenue is already exceeding 2019 levels, but on a 25% lower rig count. I guess my question is what's Change so much over the last 3 or 4 years. It seems to be increasing service intensity. I don't think it's pricing, at least not yet.

Speaker 7

So is it more Technology being used? Is it reversal of efficiency gains? And where is this most prevalent in your business? Is it well construction where it's most prevalent? Just help me understand the Service intensity patterns you're seeing?

Speaker 2

You are correct. And I

Speaker 4

think the as part of

Speaker 2

the mix as well, the international has made a comeback Ahead of our basins and you will see the next leg of growth coming from Middle East activity in the coming quarters. But I think that's one factor. But I think technology to deliver performance, our customers are more focused On Critical Assets, where they want execution and they want performance enhancements and higher return on their capital, Lower cost, higher return, but this translates into higher adoption of Fit technology, higher adoption of digital technology and the power of integration. So when we have the power of integration, technology adoption and are increasingly being recognized for performance and Some of it's through contracts that are performance based. I think we are gaining recognition and we are in effect creating a net Increase in the intensity of service, but also a net pricing impact.

Speaker 2

And I think that pricing It has many, many dimension. It comes from a mix of adoption of technology. It comes from the performance That for which we are getting commercial contracts to recognize and share the value of the performance of Kate. And it comes from Pricing, catalog pricing, as I would say, the combination of which is creating a net effect that we have been benefiting from and indeed Partially in Weld Construction, where I think the breadth of Caballade we have that is unique across the industry, the track record Of benchmark of performance, the competence of our people, the digital operation transformation we did, All have impacted our cost of service delivery, for 1, have impacted the performance we have created for our customers And as such, as credit, the service intensity that is creating higher earnings.

Speaker 7

And then just sticking on the well construction business, You also said and you noted in the release that a lot of the growth so far this year has come out of North America and Latin America. It was interesting that Middle East, Asia has actually lagged. With everything you're talking about with the Middle East, should we be expecting this trend to kind of reverse next year? Should we Expect well construction to be sort of the leader I'm sorry, should Middle East be the leader in well construction next year? And you hit another level of margins this Should we expect those margins to continue to go higher as this mix shifts more into the Middle East?

Speaker 2

That's A fair hypothesis going forward. I think the Middle East has been lagging the growth and the rebound primarily due to Some of the constraint due on the short cycle over the last 18 months due to OPEC plus but I think the 4 or 5 countries that have I set some new expansion plan. I have initiated this expansion plan in the second half And I said to accelerate the expansion plan going forward. I think it includes Saudi, it includes UAE, Kuwait, Jacques and what has been the first to expand, which is Qatar, on the LNG commitment towards 27 will continue to expand as well. So I think the combination of this will create a new leg of growth next year Internationally, and we will be set to benefit from it across all the divisions.

Speaker 7

Fantastic. Thank you.

Operator

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

Speaker 8

Hey, good morning, everybody. I guess maybe

Speaker 2

a quick

Speaker 9

follow-up

Speaker 8

To Dave's question around pricing or I guess maybe some of your earlier comments around pricing, I'd like to flush that out a little bit more and think about kind of international pricing and Pricing and the potential momentum that this could see this cycle. Me personally, I think that investors are underestimating the potential pricing momentum International could see this cycle. I think that people forget what discipline and market consolidation and higher barriers to entry Actually do for pricing and obviously international ticks all those boxes. And then we haven't invested in International, our OFS companies have it in almost a decade. So it seems like there's a recipe for rather quickly tightening of tightening of fundamentals in a real pricing cycle in international.

Speaker 8

So I just kind of be curious, your thoughts, what you're seeing on pricing and kind of as we look forward over the next What are your expectations on fundamental tightness that could drive some real pricing momentum?

Speaker 4

Well, I think we are seeing this already today. And I think we have

Speaker 2

Passing impact, Stallard, as I said, 2 years ago, 1.5 years ago in North Samark has been broadening, has been very visible internationally in the last quarter. So the all the final developments for are in place indeed. 1st and foremost, I think the capital discipline that we have in our organization It's remaining firmly in place. Capital stewardship is clear to us, and we deploy And I said in the contract and in the market to be accretive to our returns. The service intensity also Considering the deployment of more offshore rigs, it's also increasing the pool on the existing Net pool of resource technology that is carrying further stretch on the demand of supply in our capacity.

Speaker 2

And finally, as I said earlier, the performance factor on the base foundation of Of our operation, be it our core performance, be it technology that are fit for basin and are creating a performance premium for our customers Our digital operational digital portfolio that we are holding out are creating a performance impact that the customers are looking for. Customers are willing to develop and are keen to develop their assets, provided that we develop them we help them develop them efficiently At lower capital intensity and with beating the curve and creating new performance benchmark. And I think this has a price And I think we differentiate in this environment. So we expect the future indeed internationally to support This pricing and this market conditions. Okay.

Speaker 2

Awesome.

Speaker 8

Appreciate the color. Unrelated follow-up,

Speaker 2

If we can

Speaker 8

kind of go to the Subsea business and just kind of maybe a state of the union update, just kind of general market outlook, pricing starting to move, Maybe I don't know if there's any updates on kind of what margins subsidy margins are today and how much margin expansion you might be able to see over the coming year or 2?

Speaker 2

No, as we commented earlier and we commented in making of our subsidy JV and we addressed some of this as in Previous communication, we are very constructive into the deepwater market going forward. The recent Pipeline of FID that has been blessed in recent months. The pipeline that is set in 2023 according to GoodMac It's the $170,000,000,000 of FID that will be the highest in the last 10 years since 2011. And the mobilization of project across the different Ebola Basin continues. There are some Clinical and very positive trends in Brazil, in Norway, Guyana continue to be and that Latin America Basin with Still some appraisal both from the Colombia Gas Offshore or The Suriname will be complemented by further activity in Africa and also in Asia.

Speaker 2

So we are positive on the outlook. The number of trees is growing and has grown visibly to now exceed 300 trees. And these are this is setting the market condition for supporting higher price and again, Linked to performance in life cycle reduction, performance in measured in reservoir recovery using boosting and processing technology that Becoming increasingly critical and hence we believe the condition are set to be positive for deepwater, partly for Subsea market.

Speaker 8

All right. Perfect. Appreciate the color. I'll turn it back over. Thanks, Olivier.

Operator

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

Speaker 10

Yes. Good morning, Olivier. I wanted to perhaps see if you could elaborate a little bit more on well construction. Your margins grew 400 basis points sequentially. Maybe you could elaborate on just the drivers of the margin expansion and help Put some of the results that Walt constructed into historical context with the top line at above $3,000,000,000 in terms of 3Q?

Speaker 2

I think it's a combination where We are obviously extremely pleased with the performance of Well Construction during the last quarter, but not only during the last quarter. I think it has been a division that has been on a journey for the last few years, Well, we realize that we have the opportunity to put together the best and the biggest portfolio The most comprehensive breadth of capabilities across the technology portfolio for rail construction, We adjusted and changed the structure and organization to combine all of this in one division less than 3 years ago And about 2 years ago and we are creating the benefit from this, both from technology adoption, from performance integration And from customer intimacy giving us opportunity to expand our market access and expand our success And then critically creating the pricing impact and the earnings impact we want. So Part of this, we have Fit for Obesity technology that have created a unique performance impact and work on as such. We have digital operation That we're increasingly using to impact the performance and the accuracy of our well placements and the efficiency of our operation, As such, reducing our cost of service delivery.

Speaker 2

And we continue to introduce, I would say, technology that are making an impact on the market. So we are positive for the outlook. It's the biggest division. It has and it will continue to lead in the core going forward. And we remain very, very optimistic about the outcome and we believe that the customer recognize the performance And look for using and adopting well construction.

Speaker 10

Great. Just a follow-up. One of the sources of upside versus our model Was the revenue growth in Europe CIS Africa? I was wondering if you could help us understand, I think, over 20% increase in sequential Revenues, drivers of 3Q and thoughts as we enter into Q4 in terms of that broader region?

Speaker 2

I think it was mostly offshore. It was driven by a significant contract That we have been executing in an offshore environment, in Europe, in the Black Sea, In Norway, in Africa, we've rebound of operation. I think the mix has been highly favorable and this is the power of our core And including well construction that has been played out very well. We have many contracts that we have announced and we have been We have been communicating earlier like the Oman Longe project. I think we had some progress there.

Speaker 2

We have our Black Sea Deepwater project and we have more that have been combining to create much impact on Pollution System, Pollo and Pollo and well construction during the quarter.

Speaker 10

Great. Thanks a lot.

Speaker 2

You're welcome.

Operator

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

Speaker 11

Good morning, team, and looking forward to seeing you here in a couple of weeks. I guess, we'll talk a lot about strategy then. Sounds like margins and top line are going to be improving, but can you just give us any color at how you think about the Sequential 3Q to 4Q across business lines as it comes to earnings. And then the follow-up is on working capital. You had made a comment that you expect it to accelerate into the Q4.

Speaker 11

Any comments there would be great.

Speaker 4

I think first, I think I've been sharing in my prepared remarks some

Speaker 2

guidance that Comparing the Q4 to the Q4 of last year with mid-20s revenue growth and 200 bps EBITDA expansion. And I think from the geography of business line, I would only comment that we see an uptick In Middle East to materialize, and we expect digital to further accelerate and to reflect the year end sales that we typically have. So It's a positive outlook, continued growth both internationally and in North America and the margin expansion to set to continue its Very successful

Speaker 11

journey. And then on working capital, We start to see some of that release come up into in this quarter, but just how should we think about that here over the next couple of quarters?

Speaker 3

Yes, Neil. As you saw indeed the working capital improved quite a bit in the Q3. This is how we And it resulted into strong free cash flow. Going into Q4, you will see this accelerate as we Typically see at the end of the year also working capital will continue to unwind and free cash flow will continue To increase. We have typically at the end of the year higher customer collections.

Speaker 3

We have the effect of higher product It's reducing inventory, so this is what we expect.

Speaker 11

Okay. Thanks, Steve.

Speaker 5

Thank you.

Speaker 6

Thank you.

Operator

Next, we go to Scott Gruber with Citigroup. Please go ahead.

Speaker 6

Yes, good morning. I had a question.

Speaker 1

Good morning.

Speaker 6

Good morning. So on digital, one aspect that appears to be underappreciated is just the time required to migrate On to the Delphi system. While you get paid for the migration process, I imagine that the margins are definitely better during the deployment phase. So is it accurate to say that after a few years of selling the platform and undertaking the migration process for customers, are you coming upon an inflection point just in terms of Getting customers, utilizing the system and transitioning to the data consumption phase, kind of where are we at in

Speaker 4

I think it's a very good observation.

Speaker 2

I think we expect indeed that The journey of digital transformation for our customers will take time, and I think it's a long tail of transformation we expect That will impact our results for a decade to come, I would say. However, we are indeed Observing an inflection point that is reflecting onto the maturity of our platform, onto the acceptability of this platform as the most effective Platform that the customer have seen in terms of impacting their life cycle reduction, impacting the productivity of their asset team And providing them access to cloud computing resource and to digital operation capability that is not It's not available to them today. So we are seeing the adoption of our customers. We mentioned in the past That we have a baseline of 1500 customers that are currently using our digital solution And our previous software suite of products and we believe that we are today between 203 100 of those customers, about 20% Of these that have already adopted and have started to move and transition onto the platform and we expect this to accelerate both in number of customers, but also into the expansion these customers are using the way they are using So our platform and expanding the workflows, expanding the scope, indeed, adding the data enterprise solution As a necessity to go and reset and transform their data infrastructure and then adopting workflows from subsurface workflows to operational workflows.

Speaker 2

So there are multiple dimension, complete intensity dimension, workflow dimension and customer number of customer dimension that we are set to benefit for the years

Speaker 6

Great. I appreciate all that color. And then switching gears to the new energy Portfolio and decarbonization, you guys have been active in building out that new energy portfolio, while at the same time developing solutions and partnerships to help drive decarbonization of the oil and gas industry itself. Olivia, can you just Compare the commercial opportunity of the 2, I would surmise that the commercial opportunity on the decarbonization front is greater Over the next 5 years versus new energy, but I wanted to hear your perspective.

Speaker 2

I think it's both. We believe that there is a compelling event and a compelling need and At most priority for oil and gas to decarbonize itself, it comes into the engagement we have And the success we're having with Energies' transition technology portfolio to reduce the carbon footprint of the Scope 1 and 2 of our customer, It comes in bright light with the portfolio we have created, the CEES portfolio, end to end emission management for methane, In particular, I'm getting more traction and more success with this portfolio. So I believe that this is happening at scale, And our customers are turning into a clear, I would say, Initiatives set of initiatives to reduce the carbon footprint of their operation and to target the lower carbon Oil and the lower carbon gas production. So this is the first trend and this is happening at scale and this will include CCS opportunity that we are developing as well in parallel. On the side of this, there is a lot happening into the clean energy, And I believe that you have seen some announcement in the IRI.

Speaker 2

You have seen some announcement in the REAPOWER EU that are aligned with the domain we have selected, be it Geaux Energy for efficiency, be it Critical Minerals to Lithium or be it Hydrogen with getting credit At Large and WCCCS with the 45Q improving to help us address not only the CCS opportunity to That are close to our oil and gas customers, but also the one that are close to your hard to abate sector. So I believe that I will not try to contrast both. I will more recognize that both represent huge opportunity of growth, existing customers and with new customers, We are set to go and build opportunity on both.

Speaker 6

Got it. Appreciate the color. Thank you.

Speaker 10

Thank you.

Operator

Next, we go to Roger Read with Wells Fargo. Please go ahead.

Speaker 9

Yes. Good morning. Congratulations here on the quarter.

Speaker 7

Good morning.

Speaker 9

Look forward to seeing you all in a couple of weeks. I guess what I wanted to ask is 2 different things. 1, as you look at the margins and obviously that's one of the positives here And we compare, I'm just going to say EBITDA margins, but you can choose whichever you want. We look back over time, you've gotten back in the right You know, kind of neighborhood here for what we would expect Schlumberger to deliver. If we look at what you're doing in terms of Better market expansion, service intensity you've mentioned, pricing power and the digital, should it Be the kind of situation where we can start thinking about margins getting back over the next several years to levels you've seen When business is truly firing on all cylinders or is that a little too optimistic here?

Speaker 2

I think we first, we will look forward to see you at the event in 2 weeks and indeed comment on this and give you more color. But it's clear that we are seeing and we are very positive on the outlook both on the market fundamentals that are in place To support our ambition for growth across the core of digital and new energy for the reason mentioned Before I discuss during this Q and A. And also, we believe that the investment we have done and the performance we are delivering for our customers This is giving us indeed earnings power that will translate could you translate in margin expansion going forward. So this is set, and I think we'll comment more I'll give you more color on our ambition going forward.

Speaker 9

That's fair. I knew that was kind of a leading question on that, but I thought I'd try it. The other one is and this might be getting a little ahead of what you want to talk about in a couple of weeks. But can you remind us where you want to take the balance sheet in Terms of fee comfortable enough with where your overall debt structure is than where we would think about more of a Continuous or somewhat reliable way to think about dividend increases and anything else you would do with free cash.

Speaker 3

So Roger, first, we are quite happy with the progress we've made In deleveraging the balance sheet, we have not set a new target, new leverage target at this stage. But As I mentioned earlier, we do continue to see the balance sheet continue to increase. As it relates to The uses of capital, as you saw, we made the first step in increasing returns to shareholders by increasing our dividend by 40%, starting with The July payment and in the future as cash flows grow over the cycle, clearly, there will be opportunities To continue improving returns to shareholders and clearly as well we will provide you more details on November 4 in New York.

Speaker 9

I appreciate it. Thank you.

Operator

And our last question will come from Luc Lamoine with Piper Sandler. Please go ahead.

Speaker 4

Hey, good morning.

Speaker 5

Good morning.

Speaker 4

Olivier, maybe to attack Roger's question just a little different way. I Want to see if you could touch on this multiyear international cycle, how it's unfolding? And can you talk about how you see that versus 2,005 to 2,008 Pricing was very strong.

Speaker 2

I think it's always difficult to compare mega and analog between the bidding cycle, but I think I will more focus on what is unique about this cycle. I think the condition are set and it includes a few Critical, I would say, factors that I think I don't think can be comparable And will lead to a unique cycle. 1, I would say, is the global gas market is uniquely constrained And it's structurally in balance. And I think this will lead the gas market both Onshore, Onshore, Uncontinental and Conventional to continue to have a longer growth cycle independently of the, We see some headwinds on economic market. 2nd is offshore.

Speaker 2

Offshore has indeed started. Offshore, we have conditioned From breakeven price that are with oil FID below $60 if not $40 that are set to support a very stronger offshore environment For oil and in the gas environment, obviously, and this is very visible both in deepwater and in Middle East. Middle East We'll have one of the highest growth in offshore environment with more than 30 weeks. We are just contracted in The last 6 months by Saudi for oil development offshore. And last, I would say that Middle East You said to have a combination of factors that include the maximum sustained capacity commitments or the enhanced capacity That has been committed by many countries in excess of 4,000,000 on Bahrain between 2025 2,030 and will not be surprised to see this And the result of this, because Middle East is also growing in its gas ambition, Not only because of the LNG commitment from Qatar to exceed 120 MTPA by 2027, But also because the uncommercial and commercial resource are being exploited for domestic and for regional markets.

Speaker 2

And all of that combined, the oil capacity expansion, the gas will result into the largest ever investment cycle in Middle East and this is starting and this will be happening in the next 2 or 3 years. So 2 or 3 years, Middle East will benefit from the largest investment cycle that we have seen. So you have unique characteristics that Can and cannot be compared with the past, so I just want to focus on getting the best of this future market, positioning ourselves Using our performance attribute, using our unique technology and preparing the team to participate at scale and being successful for our customers

Speaker 6

Okay. All right.

Speaker 4

Thank you very much.

Speaker 2

You're welcome. Thank you, sir. I believe that this will we will close this call. So ladies and gentlemen, I think to conclude, let me Summarize with key takeaways that I would like you to remember. Firstly, the Q3 results represent another quarter of outstanding execution financial outperformance in our returns focused strategy.

Speaker 2

This was achieved through the combined effect of significant international activity inflection, Technology adoption, operating leverage and pricing premiums. These results give us the confidence in our ability to deliver upon our promise and exceed our revised guidance for full year 2022. Secondly, we are witnessing a decoupling of upstream investment from uncertainties in the near term economic outlook. Constructive market fundamentals Reinforced by the energy crisis are decisively aligning in support of a multiyear upcycle. Furthermore, the activity mix and investments Trends continue to evolve very favorably in Alamo with our strengths, both geographically and across the breadth of our portfolio.

Speaker 2

Finally, the secular trends of digital transformation and decarbonization continue to gain momentum for a higher value And lower carbon future of our industry. Whilst at the same time, the global urgency on climate actions is resulting into an acceleration of clean energy investments. This is creating a unique combination of opportunity we are set to pursue at scale through our 3 engines of growth, core, Digital and New Energy. Ladies and gentlemen, I could not be more satisfied with our performance to date and with our outlook for the full year, To close the 2nd of 3 years with remarkable progress against a very challenging backdrop, we are ready to further success and continue our journey towards a bright future for the company. Thank you very much.

Operator

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

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Earnings Conference Call
Schlumberger Q3 2022
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