SLB (SLB) — Q3 2019 Earnings Call Transcript

Good morning. Good afternoon. Good evening. And welcome to the Schlumberger Limited third quarter 2019 earnings call. Today’s call is being hosted from New York City, following the Schlumberger Limited Board meeting held here this week. Joining us on the call are Olivier Le Peuch, Chief Executive Officer; and Simon Ayat, Chief Financial Officer. Our earnings call will take a slightly different format. We have shortened our prepared remarks in order to leave more time for your questions. Olivier will start the call with his perspective on the quarter, after which Simon Ayat will give more details on the financial results. Then we will open up for your questions. As always, before we begin, I’d like to remind the participants that some of the statements we will be making today are forward-looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. I, therefore, refer you to our latest 10-K filing and 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 third quarter press release, which is on our website. Now, I will turn the call over to Olivier.

Thank you, Simon. Ladies and gentlemen, good morning. I would like to ask through the earnings release my comments on the quarter before covering some of the points critical to understanding. First of all, as you have seen in our release this morning, we have taken enough of the non-cash $12.7 billion charge. This charge reflects the impact of market conditions on the valuation of our goodwill, intangibles, and fixed assets. None of these changes our ability to generate strong cash flow, as these quarters have once again demonstrated, leaving us flexibility to navigate a more uncertain market landscape. Simon Ayat will discuss the charge during his remarks. I will now comment on our Q3 operational performance, followed by the short-term outlook and conclude with a brief update on our strategy implementation. Our third quarter results were very positive in a mixed market environment, driven by strong international performance. The international margins improved, and we delivered more than $1 billion in free cash flow. Additionally, we recorded the best-ever quarterly safety performance for the company, an outstanding achievement setting new safety performance benchmarks for our industry. All-in-all, it was a very solid quarter aligned with our performance vision and our focus on returns. I am very pleased with the results and proud of the Schlumberger team that delivered this performance. The financial results this quarter were driven by the strength of activity in the key international markets. Some activity picked up in Russia, the CIS, and the North Sea; the Far East and Asia regions also saw strong growth, and new projects began in Sub-Saharan and North Africa. Only Latin America revenue was lower due to reduced activity in Mexico and Argentina. In North America, we experienced strong offshore sales offset by minimal growth on land. OneStim activity was modestly higher, recovering from the spring breakup in Canada during Q2. Towards the end of the quarter, however, we saw lower pricing and gaps in the frac calendar; customer award programs were constrained by cash flow. North America land drilling revenue was essentially flat, despite rig count reductions as our fit-for-basin technology access approach offset the decline on equipment sales and leasing. Cameron results closed in line with expectations, which included robust operating margins, building on sequential growth in most international regions, which were offset partially by declining activity in North America at the end of the quarter. Our international performance this quarter was also very solid, with a high double-digit basis points improvement in our margin on the back of 3% sequential revenue growth. More than two-thirds of our product lines and GeoMarkets posted both sequential revenue growth and margin expansion, leveraging strong offshore and exploration activity mix, and the deployment of new technology. At the close of this quarter, half of our international GeoMarkets have posted year-to-date double-digit revenue growth. This improvement in international margins was achieved despite the lingering and sustained effect of a handful of contracts that are highly dilutive. Without the effect of these underperforming business units, our growth in international margins would have been even greater. We are making progress engaging with our customers on those contracts, working collaboratively to improve terms and conditions and to enlist their support to improve our operations. As part of this plan, I have been taking personal actions during the last few weeks and anticipate visible progress during the coming months and quarters. Margin improvement and changes in capital deployments are both part of our increasingly retail-focused approach under the new capital stewardship element of the strategy. As international activity increases, our deployment of CapEx will be further prioritized towards the business units with higher returns. This action, together with increasing activity, is starting to create some tightness in the market which is a catalyst for pricing improvements. Now, I will move on to the short-term outlook for our business. Based on our Q3 year-to-date results and our outlook for Q4, we still expect full-year high single-digit international revenue growth, excluding Cameron. Sequentially, however, Q4 will include the seasonal activity decline in the Northern Hemisphere, and we anticipate only muted year-end sales. We are also closely monitoring the situation in Ecuador following the recent events and are preparing for further decline in Argentina. In addition, we expect seasonal weakness in North America as the fourth quarter develops. We anticipate a year-end slowdown in North America similar to last year due to operator budget constraints. However, this year the activity reduction has started earlier than last, and we expect the second quarter decline in Q4 to be more pronounced than last year. Moving on to the macro and medium-term view, the macro environment remains challenged with limited visibility, particularly in view of the global trade concerns that are affecting both economic growth and the rate of oil demand growth. At the same time, the U.S. production growth rate has declined for the last eight months and is expected to drop further in 2020 due to the reduced activity this year. Therefore, despite a recession, the prospects for international activity growth remain firmly in place. In this market context, our approach in North America land is under evaluation, both in the medium- and long-term. We are already scaling to fit the OneStim business and we will be streamlining the fleet as the market contracts during the fourth quarter. At the same time, the strategic review of this market is well underway and will be completed during the fourth quarter for execution early next year. This gives me the opportunity to update you on our strategy execution. Last month, we presented four key elements of that strategy that included leading and driving digital transformation in our industry, developing fit-for-basin solutions, capturing value from the performance impact for our customers, and fostering capital stewardship. Performance is at the heart of this new strategic direction. We are already off to an excellent start on digital. We presented our vision of the E&P industry to 800 customers and technology partners at the global SIS Forum in September. There, we demonstrated our firm commitment to an open digital environment that we believe can unlock further customer performance. This Forum marks a new chapter for the digital future of our industry. The intellect from our customers and digital partners was far beyond our expectations and is already translating into sizable opportunities. The central JV is also an important part of our digital strategy, and the announcement of its closing reinforces our leadership and commitments to the industry digital transformation. We are also making progress with our new fit-for-basin strategic approach. In the release today, there are multiple examples of fit-for-basin technology, all of which drive our customer performance, such as NeoSteer, at-bit steerable systems, and Aegis drill bit technology. In addition, in North America, I am pleased to report early success of the technology access strategy, which includes the deployment and leasing of rotary steerable tools. This is a new channel that grants access to new markets where our participation was previously minimal. Also, in North America, our flagship project with Oxy in the Aventine Basin is now operating at scale. We have continuously improved operational efficiency, setting new frac goals in the Delaware. The value being created is shared through the underlying commercial model and is a good example of our new strategy performance model approach. Finally, as another base to our SPM strategy, we have made big progress in our divestiture of Argentina assets, as we have several offers in hand that we are evaluating, with the anticipation that we will finalize with the other parties during the upcoming months. Since taking the role as CEO of Schlumberger, I have made it a point to visit many of our customers, our people, and our locations. The reception by our customers bodes well for engagements, and the strategic direction has been very positive. The enthusiasm of our people has been highly motivating, and their commitment is evident. The industry is acknowledging the need for higher performance in the current environment. All-in-all, I am very pleased with the initial steps of our strategic execution, and we have both internal and external alignment with our vision to become the performance partner of choice in our industry. I will now pass the call over to Simon.

Thank you, Olivier. Ladies and gentlemen, thank you for participating in this conference call. Third quarter earnings per share were $0.43, excluding charges and credits. This represents an increase of $0.08 sequentially and a decrease of $0.03 when compared to the same quarter last year. During the quarter, we recorded $12.7 billion of pretax charges driven by market conditions. These charges primarily relate to goodwill, intangible assets, and fixed asset impairments. As such, this charge is almost entirely non-cash. Details of the components of this charge can be found in the FAQs at the end of our earnings press release. These impairments were calculated as of August 31, 2019. Accordingly, the third quarter’s results benefited from a $27 million reduction in depreciation and amortization expense. Approximately $21 million of this $27 million monthly reduction relates to the production group. The remaining $6 million is reflected in our corporate and other line item. The after-tax impact of this one-month reduction is approximately $0.015 in terms of EPS. Our third quarter revenue of $8.5 billion increased 3% sequentially, largely driven by our international operations. Pretax segment operating margin increased by 113 basis points to 12.8%. Highlights by product group were as follows: Third quarter reservoir characterization revenue of $1.7 billion increased 6% sequentially, while margins increased 149 basis points to 21.8%. These increases were primarily driven by strong international wireline activity and higher WesternGeco multi-client license sales in North America. Drilling revenue of $2.5 billion increased 2%, driven by stronger drilling activity in Russia, China, and Australia. However, this was partially offset by lower revenue in North America land and Saudi Arabia. Margins were flat at 12.4%. Production revenue of $3.2 billion increased 2% sequentially, primarily driven by strong international completions activity. Margin increased 148 basis points to 9.1%, primarily driven by improved international margins from higher activity. The reduction in depreciation and amortization expense as a result of the third quarter impairment charge accounted for just under half of the margin improvement. Cameron revenue of $1.4 billion increased 3% sequentially, primarily driven by OneSubsea margins that increased 29 basis points to 12.7%. The book-to-bill ratio for the Cameron long-cycle business was 0.8 in Q3. The OneSubsea backlog decreased to $1.8 billion at the end of the third quarter. This decrease reflects a canceled project in the North Sea. Now turning to Schlumberger as a whole, the effective tax rate excluding charges and credits was 16% in the third quarter, compared to 16.7% in the previous quarter. We generated $1.7 billion of cash flow from operations during the third quarter. Our net debt improved by $347 million during the quarter to $14.4 billion. We ended the quarter with total cash and investments of $2.3 billion. We received $250 million in cash just after the quarter as a result of the closing of the Sensia joint venture. During the third quarter, we issued three tranches of EUR500 million notes each. The first is due in 2024 at 0%, the second due in 2027 at 0.25%, and the third due in 2031 at 0.5%. These notes were subsequently swapped into U.S. dollars with a weighted average interest rate of 2.5%. During the quarter, we also repurchased $783 million of our outstanding 3% notes due in 2020 and $321 million of our outstanding 3.625% notes due in 2022. These actions have served to improve the company’s capital structure. During the quarter, we spent $79 million to repurchase 2.2 million shares at an average price of $36.64. Other significant liquidity events during the quarter included CapEx of $415 million and capitalized costs relating to SPM projects of $194 million. During the quarter, we also made $692 million of dividend payments. Full year 2019 CapEx, excluding SPM and market client, is expected to be between $1.6 billion and $1.7 billion. And now, I will turn the conference over to the operator for Q&A.

Hey. Good morning, Olivier.

Good morning, James.

So, Olivier, as you exited the third quarter, could you describe what the market conditions were, how we should think about the fourth quarter? It sounds like it’s sequentially down. And then also, how is 2020 shaping up, in your view?

Yeah. No. Let me comment on this, James. So I will separate my comments between international and North America land, specifically. So first on the international side, I think, similar to what we see every year, there is a seasonal effect in the Northern Hemisphere due to the winter season that affects primarily Russia; it affects then China and the North Sea. We see and affect every year on rig activity and revenue that we collect from those regions. This is not unusual: we don’t expect any minimal impact than we have every other year, but I think this is something to account for. We typically at year-end also have year-end sales of product equipment, and we believe this could happen, but it will be, as we have seen in the last two or three years, fairly muted annual sales as the operators will remain cautious on their budgets in preparation for 2020. On the flip side, on North America land, as I did comment in my introductory remarks, I believe that the rate of decline will be at risk to be higher than last year for two reasons. The usual holiday season break in the winter is looming. But also we have seen that the operators' absorption and discipline on operating within cash flow has led them to cease operations earlier than they did last year. We have started to give notice of operation gaps from September, and the rate of decisions has been accelerating. So we expect as a consequence that the rate of decline quarter-on-quarter in North America might be higher than last year’s sequential decline. Now turning to next year, I think, barring a major recession or significant geopolitical or economic events, we foresee that international growth will remain in place, albeit possibly at a different lower rate. We believe that the strength of offshore activity, deepwater or shallow, will not cease overnight, and we continue to support 2020 international growth. When it comes to North America, it’s too early to call. I believe that the market still lacks stability, and we can only comment on the rebounds in Q1, which is the usual rebound from the holiday season that we foresee happening, possibly strengthening activity from January and the strengthening of pricing, but this is too early to call.

Okay. That’s very helpful, Olivier. Thank you. And then with respect to the charges that were taken during the quarter, understanding they only helped EPS by about $0.015 here. What drove the timing here of taking these charges, especially kind of mid-year? Why not at the end of last year?

James, Simon here. I will take this.

Hey, Simon.

During the third quarter, we closely examined the carrying value of our assets due to two significant events. One is the new strategy introduced by Olivier, which has been publicly discussed and is still being developed. The second is the market valuation we observed. Although we've experienced lower valuations previously, the consistency of lower valuations during the third quarter was concerning and reached a notably low point. This prompted us to reassess our goodwill and intangible asset values. Most of our goodwill and intangibles stem from two major acquisitions: the Smith acquisition in 2010, mostly paid through stock, and the Cameron acquisition in 2016, which was about 78% stock. The book value for these acquisitions was recorded at $56 per share for Smith and $72 per share for Cameron, leading to an inflated carrying value of goodwill and intangibles given our current valuation. This analysis was extensive and detailed, resulting in the adjustments we made. The timing of the adjustments was based on events occurring in the third quarter, which is when we document changes. While year-end reviews are typical, the changes observed in Q3 necessitated a thorough review during that same period. Additionally, the increased asset impairment primarily in OneStim North America reflects our response to the excess capacity in that area. We concluded that it was unfair to retain those assets, especially since we do not anticipate their reactivation in the near future, leading to our decision to write them off. I want to ensure that everyone understands our rationale behind these actions in Q3, which was driven by genuine issues rather than a change of mind.

Got it. Thanks, gentlemen.

Thank you.

Good morning, Olivier.

Good morning, Angie.

So I appreciate the color on the international markets and a little bit of a follow-up there on pace of growth for 2020. I know it’s early, but do you still feel comfortable with mid-single-digit revenue growth in 2020 or is it still a bit early to tell for sure? And then also, I guess, I would add to that, the asset sales that occurred in 2019, the impact on both revenues and margins?

Yeah. Let me take that first, and then I will address the second one. So, I think to be clear as mid-single-digit rather than low or high. I think it’s too early to call this point. Not that we don’t have good visibility. But I think the customers are still in the process of setting their vision for 2020 and are serving the macroeconomic factors that you all know about, and I think we have to be cautious here. We believe that the continuum of offshore activity and the momentum that the industry has set there is not going to stop, particularly on the deepwater side. But I think some other regions and some other basins would be more at risk of a decline in activity or decline in pricing next year. So it’s too early to call; but clearly, we see growth in international next year. So when it comes to the impact of the announced divestiture, we have three divestitures underway. One is already closed, the Sensia. That has been closed two weeks ago. The second one relates to the divestiture of assets to the JV that we own with EDC. The third one relates to drilling and tubular accessories that we are divesting. So when you look at the impact of these three on a yearly basis, revenues will be short 2% of global revenue. The impact when you combine the three, when the three will be completely closed and completed, and the impact on the earnings will be $0.01 to $0.02 for the year. So, Simon may want to add more, but that’s the impact on a full-year basis.

I just want to explain that two of the transactions or divestitures are basically creating JVs, or one is creating the JV of Sensia; the other one enhancing the JV of EDC Drilling in the Middle East. So we are losing the revenue, and the reason we are not losing as much in earnings is because we will have a higher pickup of our equity participation in the two JVs. The third one has a really minimal impact on profitability. Therefore, as Olivier mentioned, it’s $0.01 to $0.02 per year impact on margin. However, the revenue has a larger impact, less than 2% of the total.

That's very helpful, thank you. Regarding the international aspect, could you share your thoughts on the pace of margin growth for 2020, considering your transformation initiatives, digital efforts, and the asset sales? Also, how do you see margins developing next year in the Middle East as you address those contracts?

So I will not comment on the target; the target’s not set. But the ambition we have is to continue to grow and expand our margin internationally. We have seen that we have the high double-digit basis point improvement during the quarter. I will continue to look and work using the strategy to execute to part of margin expansion for the year. If you look at it from a very high level, there are three buckets what that we see. The first one relates to our ability to resolve some of the underperforming business units, the highly dilutive contracts that are lingering and impacting our results. We have made some progress, not to the pace I would have expected necessarily, but I think, I am confident that we have a path to improve this that will impact the results next year. Similarly, in the first bucket I would put continuing to execute using our new modernized platform of operating system. I think we are setting a two-years rollout to complete our transformation internationally, and I look forward to having some pull-through on that operating model with efficiency, self-help, as we call it, impacting our margins. The next bucket is obviously, I will call it, the digital and all the technology; trying to replicate some of the success we have seen in North America oversees in technology access to third-party regional players who are accessing our technology and using it in lieu of CapEx in terms of the markets. Digital, where we expect that the outcome of what we have just done in recent months and the momentum that we have gained will give us an increased share of the digital market and, as such, will be contributing to the margin. The last would be further long-term outlook and the performance model and other horizons of growth that we will disclose later. But I believe these two buckets will clearly impact the next two to three years, but it’s difficult to say at this moment. Our ambition is to grow the international margin next year, indeed.

Thanks. I will turn it over, guys.

Thank you.

Thank you.

Hi. Good morning, Olivier. So on your fit-for-basin strategy, obviously, you are focused on the North American business right now, and after writing down assets during the quarter, you talked about more of a strategic review in the fourth quarter. We are talking about 2020 numbers, but it’s kind of hard to get there with all these changes happening in North America. I was wondering if you could just kind of lay out a little bit of kind of what you guys are looking at, like, what parts of the North America business are under the strategic review and should we expect broader retrenchments in certain parts of the U.S. land business next year?

No, that’s a great question, David. As we discussed during the strategy presentation a month and a half ago, we are conducting a thorough review of our entire North American business, not just OneStim but every aspect of our operations there. We are implementing a scale-to-fit strategy that focuses on aligning our resources with the specific needs of each business in every basin. Currently, we are in the process of applying this approach to OneStim and all our product lines in North America land. This involves assessing our market position, strengths, and technological opportunities to make informed decisions about how to streamline our portfolio for specific basins or potentially shift our business model to prioritize technology access rather than technology operation. As we progress, we also recognize that some of our developed technologies are highly successful, and we are supporting our technology team to ensure we can differentiate our offerings in each basin. Our technological successes have positively impacted our margins in North America land, and we will continue to evaluate our portfolio for potential exits, expansions, or new business models. It's still early to make definitive statements, but all options remain on the table for OneStim, particularly since it currently has a dilutive effect on our overall North American business.

Thank you. Kind of a slightly different question on North America, you highlighted some offshore strength which was a bit of a surprise, and granted there’s some seismic here. But you made a few comments about offshore being a support for the market next year. You actually highlighted international there. But I am just wondering if this is a harbinger of things to come for offshore in general, and just trying to tie that into the lower subsea Cameron orders this quarter. How do you see that trending over the next two quarters, because it sounds like you are somewhat optimistic on offshore, but I don’t want to put words into your mouth there?

No. Let me comment on this. So the view I have is that the offshore market is one that doesn’t compact and expand on a monthly or quarterly basis. It’s more steady, and it is more longer -long cycle, and that holds true for deepwater. We have seen growth because we see a slow recovery of deepwater for the last 18 months. We have seen faster recovery of the shale in the last 12 months. We believe that some of these fundamentals will stay in place. Not necessarily long-term, it’s too early to call, but to the medium-term it is the case. So I believe that the momentum in this market is here to stay for the foreseeable six months to nine months; beyond that, it’s too early to say. The FID and the rate of FID for subsea has not necessarily slowed down. I think some of them have been delayed for technical reasons. But we expect some of the key FID to be approved in the later part of this year and early next year. The subsea or OneSubsea, if we look at this quarter, I think, it is a matter of scheduling of how and when the bookings come in. We are still having a book-to-bill ratio year-to-date largely above 1 for OneSubsea. As you can see that the subsea recovery is in place, and we continue to unfold.

Okay. Thank you.

Yeah. Good morning.

Good morning, Scott.

Can you provide some color around the outlook for improvement under the new strategy? In EBITDA dollars, in free cash dollars, since assets are being removed from the portfolio to optimize around the core, margins will obviously improve. But could you provide some color around your ability to grow cash flow and free cash flow dollars, assuming limited market assistance?

I think the first and foremost ability that we have to grow cash flow is to improve margins, clearly, and that’s the first foremost. The next one for cash flow is the ability to improve our working capital efficiency, both of which we have demonstrated this quarter. Long-term, obviously, it depends on the mix and where we have seen growth in margin improvement. I still believe that fundamental international growth that we see is still in place where we have a premium on margin compared to North America. The effects and execution of our strategy; scaling to fit North America and to enhance our net margin in dollar, as well as in percentage, will be combined to improve our margins. We believe that the asset efficiency that we have improved over the last couple of years due to our transformation, combined with modernization of our working platform, will continue to have a positive effect on working capital efficiencies. You combine all this; I still believe that the ability to deliver cash will only improve, and the total cash conserving, absent a recession, will improve going forward. You want to add anything, Simon?

You mentioned most of the key points. The cash flow issue is primarily about earnings followed by the management of our capital structure and working capital. Historically, we perform well in the second half of the year, as noted previously. Our third quarter saw $1.1 billion, and we expect the fourth quarter to exceed this performance. Looking ahead to next year, we plan to be very cautious with our capital deployment, which will enhance our free cash flow and improve our working capital management. Our working capital typically consists of receivables and inventories, and we are aware of our position. We regularly manage our collections and plan to optimize them. We are confident that our cash generation from operations, along with the anticipated divestitures, will adequately cover all our commitments, including the dividend. Additionally, for next year, we will not reduce SPM investments in light of our announced divestitures, and the required investment will be less than what we have made this year.

Got it. And at this point are you comfortable with the mentioning of the drop in SPM CapEx?

I am sorry?

Are you willing to mention where SPM CapEx is going next year?

SPM CapEx this year is around 750. We expect this to be significantly lower next year, possibly starting at around 500 or 400, though we haven't finalized all the plans yet.

Got it. And then one additional question, one tweak to the strategy seems to be a willingness to selectively sell or lease technologies in various markets to third parties, which will then provide the service of well-site deployment. Can you provide some color on this tweak to the strategy and what is the breadth of this strategy by product line? Which geographies are you looking at deploying the new strategy? And importantly, how do you get comfortable around not creating additional competition in these various markets?

Yeah. Scott, this strategy we call technology access subset of fit-for-basin, where we believe that in target basins, particularly the hybrid basin, the capital intensity that is required to fulfill and prosper in the basin and the high competitiveness by local players is out there in both conditions that is capping our market access. We have realized, and we have tested this in North America, and we are accelerating the opportunity to lease or sell selective technology that we believe can help us access markets that we were not accessing before. These are two consequences. First is a new business model that is attributive to our goals and our returns. And, secondly, is to lower our capital intensity, as we typically sell these assets. So we don’t require CapEx to expand in this marketplace. Where do we do this? Typically, where there is a set of local competitors for one, which is highly located in North America, where if you were to take the drilling space, there are more than 50 local competitors competing in drilling services. We expect this to be the case in the Middle East, where there are regional players, and other parts of the world where there are hybrid basins. But when it comes to product lines, drilling is one; obviously, this is where we started. But we will not stop there. We are doing it for some of our perforating equipment in Wireline and continue to expand, and we are currently accessing a part of the strategy for every product line. The portfolio that we are waiting to sell is specifically designed to sell and/or lease to third parties. This tool capacity we have as well helps because we provide detailed services and retooling of this equipment to assure that the performance of this technology is up to par with the capability of this technology. Am I comfortable? Yes. When we put the right terms and conditions with those third-party companies to operate in a different scope with a different set of customers. We are clear, and we are becoming increasingly comfortable, as well as they are, as they are successful in deploying our technology and we are successful in supporting them and then expanding our market access.

Got it. Appreciate the color. Thank you.

Thank you. Welcome. Thank you.

Thank you. Good morning.

Good morning.

I wanted to stick with the CapEx theme here. In the core oil services business, how would you think about how much you can take out in 2020 spending? Obviously, with production group activity coming down, I would think there would be a decent amount of sustaining CapEx reduction there, but any thoughts around that?

I think it’s too early to be specific and got it down to the production group at this stage. We are pretty advanced on that. We execute the strategy in North America where there are similar volumes of production group operating there, and it’s too early as some of the activity levels are not set yet for North America and overall. Globally speaking, as announced that we shared before, has been a 5% to 7% reduction we believe. We believe that with the mix of the product line that we have, the recent divestiture of some assets, heavy product line, combined with what we anticipate in North America. I would say almost independently of the strategic execution, we mean that we will stay within the guidance.

Okay. That’s helpful. Thank you. I guess a broader question here: you have continued to highlight your digital strategy. I think many investors have a hard time thinking through the addressable market or how big a business this could be for you? How do you think about what the opportunity set is in a multiyear view for that business?

It's a substantial market. Long-term, the oil and gas industry is one of the largest markets expected to grow over the next five to ten years. Based on the feedback from oil customers and their eagerness to collaborate with us, alongside the support from oil partners and industry leaders in diesel technology, everything is aligning with our business. The potential is significant, but the challenge lies in monetization. There are three key areas to consider. First is Sensia, which has established leadership in digital workflows. We believe the adoption of DELFI by other customers is just the beginning, and this growth will continue to accelerate within our portfolio and will contribute positively to our margins. Next, WesternGeco, the data digital arm of our business, has been transformed from an asset-heavy model to an asset-light product line. We now have detailed strategies including the GAIA data platform, which aims to become an industry standard for data exchange and monetization, as evidenced by our collaboration with IHS Markit. Lastly, we are set to implement digital solutions in operational areas. In the production space, our Wireline fleet, focusing on sampling and characterization, is becoming fully digital, and its success will be a crucial aspect of our growth. This multi-faceted approach presents a large and long-term opportunity, and we are at the forefront in this area.

Thank you very much.

Good morning.

Good morning, Kurt.

Thank you for the insightful discussion this morning. I have a follow-up question related to the strategy presentation from about a month and a half ago. Olivier, you clearly mentioned the goal of raising international North American margins by at least 500 basis points. I'm curious how much of that improvement can be linked to the current contractual dynamics in relation to the execution of the strategy you presented, specifically regarding digital, fit-for-basin, and performance models. If you could elaborate on how you see this connecting, I would appreciate it.

No. Kurt, I think, as I did comment to Angie before, I see that the expansion of the performance EPS would come from two or three buckets. The first of them is that the one addressing underperforming business units, the highly dilutive contracts that are lingering and impacting our results. We have made some progress, not to the pace I would have expected necessarily, but I think, I am confident that we have a path to improve that will impact the results next year. Similarly, in the first bucket, I would put continuing to execute our new modernized platform of operating systems. I think we are setting a two-year rollout to complete our transformation internationally, and I look forward to have also some pull-through on that operating model with efficiency of self-help, as we call it, impacting our margins. The next bucket is obviously, I will call it the digital and all the technology; trying to replicate some of the success we have seen in North America oversees in technology access to third-party regional players who are accessing our technology and using it instead of CapEx in terms of the markets. Finally, I believe these three fit-for-basin, performance model, and digital will contribute to this 500 basis points improvement.

Right. I appreciate that. And then a follow-up was on the, you gave some broad general guidance in terms of business direction. So I’m just kind of curious, when you look at the lower depreciation, it was about a $0.015 impact for the core for the quarter that I guess was only one month. So if you annualize you should get a positive $0.18 per share benefit from lower depreciation. I don’t know it seems to me like the headwinds on the market potentially offset that benefit as you head out into 2020. Do you have any kind of initial perspectives on that? Do you think my assumption is kind of, my gut instinct is correct on that?

So, first, I think your math is correct. I think the annualizing this $0.015 will generate more or less the $0.18 net impact in the same scope. Now would it be offsetting to the decline? I think it’s too early to say. Again, we are looking at the outlook. As I commented before, the outlook internationally remains likely positive on both. The outlook on that is too early to call at this point. We haven’t reached the bottom in that and we are expecting to expect 2020 platform, 2019, or with the regional outlook on in 2020 too early to say. I will remain cautious about calling this at this point, but I think your assumption is quite strong for the impact in this.

Okay. Great. And then one last question, I noticed in the press release you mentioned a project cancellation in subsea. Was that a project that started earlier in the year or was it more of a recent change?

No.

Yeah.

Actually, no. It’s an order booking that was awarded to OneSubsea sometime ago, more than one or two years ago. That was put on the back burner from future FID, and this asset was actually subsequently sold from one operator to the next; the next operator decided to cancel and rethink its option for the FID, and as such, we have to remove the booking from the backlog. That’s as simple as that.

Okay. That’s great. Thank you so much for that. Appreciate it.

Thanks. Good morning.

Good morning, Sean.

So Olivier, to follow up on SPM, it’s been a challenging few months regarding the macro situation and developments in Argentina and Ecuador. Given your comments about reduced CapEx spending next year, does this indicate that you remain confident in completing the asset sale in Argentina soon? Additionally, you wrote off some smaller SPM assets; could you elaborate on how this affects CapEx and whether we are still optimistic that cash flow for SPM as a whole will exit 2019 positively, considering the impact on production in Ecuador?

Yeah. Let me comment one by one. So first, the process of the asset divestiture for Bandurria Sur in Argentina is progressing. We have completed the first phase, where we received offers, and we have a few others in hand that we are evaluating as we speak. We still do anticipate and are working every step to get signing and closing in the following months. Yes, we account for this as an impact for 2020. We are not making a decision at this point to divest any other assets. The Ecuador, the Torxen will be the main asset that remained on the SPM portfolio. The other assets that we are working with in the interim are much smaller; we initiated them a few years back, and they are not meaningful in terms of the impact on CapEx nor in terms of production revenue for SPM. So, in terms of cash flow, yes, our commitment is to operate within cash flow, and the cash flow will be positive and improving next year compared to this year, considering the divestitures we are making. We are committed to continue to keep it, so we will have lower CapEx and increased cash flow from the SPM contribution.

Thank you for that. That’s very helpful. And then just given the growing importance of digital in your go-forward strategy, are you able to quantify the baseline of digital contribution today? I know some parts would be difficult to quantify, but in reference to point of the common investor question. And with respect to the margin impact, is it mostly accretion from software, just higher margin product or are there internal OpEx benefits you can get as well?

No. Sean, I think we look at it from a digital as a business that has two characteristics. First, it is something that is transformative for the industry and is something that has a high price for all operators. So we need to be in this business, and we believe the rate of growth of digital is here to stay under the accelerator. The other characteristic is that when we operate well and we have the right intellectual property and operating model there, we have been able to generate margins that are highly accretive, which has been the case for the last 10 to 15 years. So it will continue to increase its contribution going forward, but I cannot come out at this point until we see the 2020 plan and we see the outcome of all leads and opportunities that we have reached during the last months following the SIS Forum.

Thank you very much.

Good morning.

Good morning, Kurt.

Thank you for the insightful information this morning. I have a follow-up question related to the strategy presentation from a month and a half ago. In that presentation, Olivier, you mentioned the goal of increasing international North American margins by at least 500 basis points. I am curious about how much of that improvement can be linked to the current contractual dynamics in relation to the strategy you outlined, specifically regarding digital initiatives, fit-for-basin approaches, and performance models. It would be helpful if you could elaborate on how you see these elements contributing to that target.

No. Kurt, I think, as I did comment to Angie before, I see that the expansion of the performance EPS would come from two or three buckets. The first of them is that the one addressing underperforming business units, the highly dilutive contracts that are lingering and impacting our results. We have made some progress, not to the pace I would have expected necessarily, but I think, I am confident that we have a path to improve that will impact the results next year. Similarly, in the first bucket, I would put continuing to execute our new modernized platform of operating systems. I think we are setting a two-year rollout to complete our transformation internationally, and I look forward to have also some pull-through on that operating model with efficiency of self-help, as we call it, impacting our margins. The next bucket is obviously, I will call it the digital and all the technology; trying to replicate some of the success we have seen in North America oversees in technology access to third-party regional players who are accessing our technology and using it instead of CapEx in terms of the markets. Finally, I believe these three fit-for-basin, performance model, and digital will contribute to this 500 basis points improvement.

Right. I appreciate that. And then a follow-up was on the, you gave some broad general guidance in terms of business direction. So I’m just kind of curious, when you look at the lower depreciation, it was about a $0.015 impact for the core for the quarter that I guess was only one month. So if you annualize you should get a positive $0.18 per share benefit from lower depreciation. I don’t know it seems to me like the headwinds on the market potentially offset that benefit as you head out into 2020. Do you have any kind of initial perspectives on that? Do you think my assumption is kind of, my gut instinct is correct on that?

So, first, I think your math is correct. I think the annualizing this $0.015 will generate more or less the $0.18 net impact in the same scope. Now would it be offsetting to the decline? I think it’s too early to say. Again, we are looking at the outlook. As I commented before, the outlook internationally remains likely positive on both. The outlook on that is too early to call at this point. We haven’t reached the bottom in that and we are expecting to expect 2020 platform, 2019, or with the regional outlook on in 2020 too early to say. I will remain cautious about calling this at this point, but I think your assumption is quite strong for the impact in this.

Okay. Great. I noticed in the press release that there was a project cancellation in subsea. Was that project initiated earlier in the year or is it a result of changing circumstances?

No.

Yeah.

Actually, no. It’s an order booking that was awarded to OneSubsea sometime ago, more than one or two years ago. That was put on the back burner from future FID, and this asset was actually subsequently sold from one operator to the next; the next operator decided to cancel and rethink its option for the FID, and as such, we have to remove the booking from the backlog. That’s as simple as that.

Okay. That’s great. Thank you so much for that. Appreciate it.

Thanks. Good morning.

Good morning, Sean.

Olivier, to follow up on SPM, it has been a challenging few months due to the macro environment and issues in Argentina and Ecuador. Given your comments about reduced capital expenditure next year, does this indicate that you remain confident in completing the asset sale in Argentina in the near future? Additionally, you mentioned writing off some smaller SPM assets; could you provide more details on how this will affect capital expenditure? Also, are we still optimistic that the cash flow for SPM as a whole will be positive as we exit 2019, considering the impact on production in Ecuador?

Yeah. Let me comment one by one. So first, the process of the asset divestiture for Bandurria Sur in Argentina is progressing. We have completed the first phase, where we received offers, and we have a few others in hand that we are evaluating as we speak. We still do anticipate, and are working every step to get signing and closing in the following months. Yes, we account for this as an impact for 2020. We are not making a decision at this point to divest any other assets. The Ecuador, the Torxen will be the main asset that remains on the SPM portfolio. The other assets that we are working with in the interim are much smaller. We initiated them a few years back, and they are not meaningful in terms of the impact on CapEx nor in terms of production revenue for SPM. So in terms of cash flow, yes, our commitment is to operate within cash flow, and the cash flow will be positive and improving next year compared to this year, considering the divestitures we are making. We are committed to continue to keep it, so we will have lower CapEx and increased cash flow from the SPM contribution.

Thank you for that. That’s very helpful. And then, just given the growing importance of digital in your go-forward strategy, are you able to quantify the baseline of digital contribution today? I know some parts would be difficult to quantify, but in reference to point of the common investor question. And with respect to the margin impact, is it mostly accretion from software, just higher margin product or are there internal OpEx benefits you can get as well?

No. Sean, I think we look at it from a digital as a business that has two characteristics. First, it is something that is transformative for the industry and is something that has a high price for all operators. So we need to be in this business, and we believe the rate of growth of digital is here to stay under the accelerator. The other characteristic is that when we operate well and we have the right intellectual property and operating model there, we have been able to generate margins that are highly accretive, which has been the case for the last 10 to 15 years. So it will continue to increase its contribution going forward, but I cannot come out at this point until we see the 2020 plan and we see the outcome of all leads and opportunities that we have reached during the last months following the SIS Forum.

Thank you very much.

Hey. Thanks for squeezing me in. I guess the first one, I will start on 4Q. I am just trying to think about the outlook for fourth quarter. I guess 3Q you have $0.43 if we kind of gross it up for the $0.03 of the lower D&A for the full quarter. That’s a $0.46 number, and it sounded like North America will be significantly down in the fourth quarter, and I wasn’t sure about international if it will be up or not from your commentary. But can you maybe help us kind of bridge the gap from that $0.46 number and how much EPS could potentially be down?

I would comment on the activity; I will not give quantitative guidance on the EPS at this point. I will repeat what I shared during my introductory remarks. What we see on international is sequentially, we see an anticipated activity decline in rigs and activity can largely be down due to seasonal effect, winter season in the Northern Hemisphere which is here to stay once every year. The magnitude of it will depend in Russia, particularly in the North Sea, Russia and China to this extent have this effect. We don’t anticipate to see a tangible, if any year-end sales that could offset this partially or fully, and we have some exposure as mentioned as counted before in Argentina, that could further decline due to the investment climate that has moved there. Finally, you heard about the Ecuador; Ecuador civil unrest that happened a week and a half ago, which had some consequence on our operations for about a week, a bit less than a week, where we restored production at this stage. So this is a combination of impacts that we foresee for international. That means not activity increase for sure. Now, in the North America, I think, it’s more difficult to exactly pin point where the market will end up internal activity, but the rate of decline on the permits, the rate of decline on the rigs that has accelerated from July to September, the rate of decision in the last few days and weeks on the pulling pipe commitment for the following three months has accelerated, and as such, we anticipate that the year-on-year the sequential decline from Q3 to Q4 in North America will be greater than it was last year.

Okay. All right. Understood. Got all that. And then just coming back to Sean’s question on the digital side, it sounds like you have got a lot of revenue opportunity on the digital side as we kind of move forward over the medium to longer term. Could you talk about which businesses you see the most opportunity to leverage digital, and then ultimately how meaningful of a revenue opportunity do you think this could be for Schlumberger?

The primary business lines poised to benefit are SIS and WesternGeco, both of which are fully invested in the digital workflow and data marketplace. This sector is set to continue expanding, and while we need to observe its relative growth, the momentum is evident and the early signs are promising. Next, I would highlight Drilling. We have a platform that, along with certain software like Hilox and the drill plan announced commercially during this assessment, offers opportunities for digital automation on a large scale. This automation could significantly improve self-processing in drilling rigs and can be implemented on both offshore platforms and onshore rigs. We are actively collaborating with operators to speed up this product realization and make a tangible impact in drilling. Lastly, production will build on the successes we're aiming for with the Sensia joint venture, working closely with Rockwell Automation. I will be discussing this further at the Automation Fair in Chicago next month and meeting with their Board to ensure we are aligned in supporting the Sensia JV.

Got it. Understood. All right. I will turn it back over. Thanks.

Thank you very much. So before we conclude the call today, I would like to reiterate three key points. First, our Q3 performance was very solid. We expect international margins, while mitigating the North America land activity headwind. We delivered strong free cash flow and recall safety performance. Second, the new company vision is gaining industry-wide acceptance and the initial progress on the strategic execution is very encouraging. Third, we have adopted a capital strategy as an operational mindset to deliver increased terms, investment discipline, optimization of working capital, and overall margin expansion. Ladies and gentlemen, thank you very much for your participation today. Lya, you may now conclude the call.