SLB (SLB) — Q3 2020 Earnings Call Transcript

Thank you, Cynthia. Good morning, and welcome to the Schlumberger Limited Third-Quarter 2020 Earnings 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 Peuch, Chief Executive Officer; and Stephane Biguet, Chief Financial Officer. For today’s agenda, Olivier will start the call with his perspective on the quarter and our updated view of the industry macro after which Stephane will give more detail on our financial results. Then we will open for questions. Before we begin, I would like to remind all 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 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 third-quarter press release. With that, I will turn the call over to Olivier.

Thank you, ND. Ladies and gentlemen, good morning. Thank you for joining us on the call today. In my opening remarks, I would like to focus my commentary on three parts: first, our third-quarter operational and financial performance; next, progress with the implementation of our strategy; and third, our updated view on the near-term business outlook. After this, Stephane will provide greater details on our financial results. In the third quarter, we had an opportunity to demonstrate the significance of the measures we have taken over the last few months and set a marker of outperformance—through top-line resilience, margin expansion, and by maintaining our strong cash generation track record. In an ongoing activity trough, our third-quarter sequential performance was exceptionally strong. Yet again, we continued to maintain benchmarks of safety and service quality in our operations. Sequential margin expansion rebounded by more than 300 basis points for both IBT and EBITDA, and free cash flow was solidly positive. The strength of our margin expansion and free cash flow performance is even more impactful in the context of a slight top-line decline and the exceptional items during the quarter. I would like to thank the entire Schlumberger team for this remarkable performance and for excellence in execution. These results represent a defining step in the reset of our earnings power at the trough of the cycle and set the stage for our long-term outperformance. Starting with operations, in the third quarter, we maintained benchmark integrity performance, with year-over-year improvements of 30% in HSE incident frequency and 34% in reliability. Operations integrity remains an area of strength for Schlumberger and the foundation of our performance strategy; our consistent service delivery earned several letters of commendation from our customers and is the basis of multiple new contract awards recorded in the quarter. Financially, we posted higher sequential pretax operating margins, more than 20% EBITDA growth, and positive free cash flow—despite the severance payments and reduced working capital release versus the prior quarter. These results clearly set us on the path to our intermediate goal of restoring 2019 EBITDA margins before the end of 2021. Now, let me turn to our strategy. First, our restructuring program is progressing well and we are on track to realize most of our permanent structural cost savings as we exit this year. We also began the transition to our leaner customer-aligned structure comprised of Divisions and Basins, designed to support the basin-specific innovation that will solidify Schlumberger’s position as the performance partner of choice. Next, in North America, we achieved key milestones on our scale-to-fit strategy with two transactions that advance the high-grading of our portfolio, while lowering capital intensity and volatility—the Liberty transaction and the low-flow divestiture. The closing of these transactions will not only enhance our EBITDA margin at the global level but will further support lower capital intensity and an accelerated path to our financial goals for North America. Looking ahead at the benefits of this strategy execution, we are set to significantly improve the company’s future operating leverage. And as the market activity recovers from the current trough, we have the potential to restore EBITDA to the 2019 mark of $6.6 billion by recovering only half of the year-on-year revenue decline. Our performance strategy also focuses on new horizons of growth, which includes Digital and Production & Recovery. The industry is rapidly embracing digital enablement and shifting capital investment toward maximizing production and recovery from existing assets. Where these two industry shifts converge in essence, where digital intersects with production and recovery, Schlumberger has a unique opportunity to deploy the full power of our industry digital platform and domain expertise, spanning reservoir and production for the benefit of our customers. The best example of this was the application of our Agora edge AI and IoT solutions on our APS project in Ecuador. By connecting field equipment to the cloud and running predictive AI at the edge, we boosted production by 30% on Agora-connected wells while significantly reducing field crew visits to these wells and, as such, cutting HSE exposure and environmental impacts. This created revenue and margin on an APS project where we captured the value directly and is just an example of what is possible at scale when we use the power of the industry digital platform to blend hardware and software to enable people—wherever they are located—to make performance impacts with digital. In addition, we continued to expand the reach of our digital platform, as demonstrated by the IBM Red Hat OpenShift agreement, further enabling adoption of our platform around the world, and particularly, with NOCs. In the quarter, we have also secured notable subsea and artificial lift contracts in the Gulf of Mexico and in the Middle East, which will result in the growth of our installed base and greater exposure to Production & Recovery CapEx and OpEx—a strong platform for the future. Finally, we continue to develop our New Energy portfolio with progress in our hydrogen technology venture, Genvia, and the creation of a geothermal project development company, which complements our low-heat geothermal venture, Celsius Energy. These exciting ventures represent a mix of unique opportunities for Schlumberger to create a differentiated market position through the energy transition. In parallel, we continue to develop avenues to contribute to the decarbonization of oil and gas operations, leveraging our technology, expertise, and execution platform to reduce our environmental impact while helping our customers reach their environmental goals. Let me take a few moments now to talk about the outlook. In the short to mid-term horizon, the market uncertainties persist as the economic recovery remains fragile. The pace of demand recovery could possibly slow or pause as a result of a second wave of pandemic outbreaks or heightened pandemic control measures. Similarly to the third quarter, we also face risks of lingering COVID-19 operational disruptions internationally as we enter the winter season. In this context, we will continue to focus on what we can control and react promptly if necessary. Now, absent of a pause in demand recovery or higher COVID-19 disruption, the fourth quarter activity will likely extend the trends experienced as we close the third quarter, with the continuation of a modest activity uptake in North America and the stabilization towards a steady activity internationally—albeit with visible seasonal variations, the combination of which resulting in about flat outlook overall for the quarter. Looking out further, the prevailing uncertainties make it much too early to call. However, directionally, and absent of a slowdown in the pace of economic recovery, we anticipate the overall activity to consolidate gradually during 2021. In line with the most recent IEA projections, we see that the conditions still exist to rebalance demand and supply with improving demand recovery supported by economic stimulus measures and continued supply discipline from the major producers, ultimately resulting in a visible activity rebound. North America land is expected to continue its subdued recovery in frac and drilling activity towards production maintenance levels. Internationally, as demand recovers, a pull on short-cycle supply will result in an activity inflection, this being anticipated by most operators currently evaluating options to restore activity. Having shared our view on the outlook, let me now hand over to Stephane who will talk more about our financial results.

Thank you, Olivier, and good morning ladies and gentlemen. Third-quarter earnings per share, excluding charges and credits, was $0.16. This represents an increase of $0.11 sequentially and a decrease of $0.27 when compared to the same quarter of last year. During the quarter, we recorded $350 million of pretax restructuring charges. These charges primarily relate to facility exit costs, as we continue to rationalize our real estate footprint. As a result of these charges, our pretax operating income will increase by approximately $15 million per quarter going forward due to reduced lease and depreciation expenses. Overall, our third-quarter revenue of $5.3 billion decreased 2% sequentially. Pretax segment operating margins increased 355 basis points to 10.9%. More importantly, company-wide adjusted EBITDA margins increased 371 basis points to 19.4%. As a reminder, our full-year 2019 adjusted EBITDA margin was 20.2%. In other words, we are well on our way to restoring our precrisis EBITDA margins of 2019, despite the severe revenue reduction we have experienced. This will be achieved through the combination of our restructuring actions and the high-grading of our portfolio. As a reminder, our restructuring program will permanently remove $1.5 billion of fixed costs on an annual basis. We have achieved more than 80% of these cash savings as of the end of the third quarter. We expect to complete most of the remaining actions as we exit the fourth quarter. As it relates to the high-grading of our portfolio, we achieved two significant milestones this quarter with the signing of an agreement to divest our North American low-flow artificial lift business in a cash transaction, followed by an agreement to contribute our OneStim pressure pumping business to Liberty Oilfield Services in exchange for a 37% equity interest in Liberty. We received antitrust clearance for both transactions and we anticipate each of the closings to occur before the end of the year. It is worth noting that both transactions will be accretive to our earnings in 2021. Let me now go through the third quarter results for each segment. Third-quarter Reservoir Characterization revenue of $1 billion decreased 4% sequentially, while margins decreased 90 basis points to 16.7%. These decreases were primarily due to lower sales of WesternGeco multiclient seismic licenses in North America offshore. Drilling revenue of $1.5 billion decreased 12% sequentially while margins were essentially flat at 9.5%. The revenue decrease was driven by an activity decline in US land where the rig count dropped significantly combined with COVID disruptions and customer budget adjustments in several international GeoMarkets. Despite the revenue drop, margins were resilient as a result of cost reduction measures. Production revenue of $1.8 billion increased 12% sequentially and margins increased 11 percentage points to 12.6%. These increases were largely the result of a resumption of activity in our APS projects in Ecuador, following last quarter’s production interruption caused by a major landslide. OneStim also increased on higher fleet utilization, while profitability improved across each of our Completions, Artificial Lift, and Well Services product lines due to cost reduction measures. Cameron revenue of $1 billion decreased 5% while margins decreased by 162 basis points to 6.3% on lower OneSubsea revenue in Asia and Europe, as well as lower Surface Systems equipment sales in North America. Now turning to our liquidity. I was again very pleased with our cash flow generation. During the quarter, we generated $479 million of cash flow from operations and $226 million of free cash flow, despite making $273 million of severance payments. This performance confirms that our cash flow generation capabilities remain intact. As a result, we will generate excess cash once our restructuring efforts are complete and, therefore, be in a position to deleverage the balance sheet. We ended the quarter with total cash and investments of $3.8 billion. Our net debt at the end of the quarter was $13.9 billion, an increase of $149 million compared to last quarter, but down almost half a billion when compared to the same time last year. During the quarter, we spent $200 million on CapEx and invested $28 million in APS projects. Our total capital spend for 2020, including APS and multiclient, is still expected to be approximately $1.5 billion. This represents a 45% decrease as compared to 2019, mostly coming from lower CapEx in North America and reduced investments in APS projects. We took further steps to strengthen the balance sheet during the quarter. We issued $500 million of 1.400% Notes due 2025. The proceeds will be used to repay 2.200% Notes that mature in November. We also issued $350 million of 2.650% Notes due 2030. The proceeds were used to pay down commercial paper borrowings. Finally, we ended the quarter with available liquidity of $10.8 billion. Before I conclude, and just as a reminder, due to our corporate reorganization we will report our results on the basis of the four new Divisions starting in the fourth quarter. We are working to provide historical restated financial information based upon the new Division structure and expect to publish this in November. I will now turn the conference call back to Olivier.

Thank you, Stephane. Ladies and gentlemen, I think we are ready to open the call for the questions.

First, just a statement from me. I really appreciate you clearly stating the goal of returns above your cost of capital, or value creation as we see it, because most of the industry has lacked that progress in the last decade or so. So thank you for stating that as a clear goal of Schlumberger. The first question I have for you is you've taken several defining steps towards the reinvention of Schlumberger so far, using this crisis to your somewhat advantage. Could you talk maybe about the steps taken, and then what we should expect going forward?

Thank you for the question, James. We are committed to continuing our strategy to enhance our returns above the cost of capital, which is fundamental to our approach. We plan to achieve this through improved cash flow, margins, and disciplined capital management. We have used the crisis to restructure our organization in line with our expectations of a new normal, anticipating a structurally smaller market with different characteristics. One key aspect is our focus on regionalization, leading to the establishment of our Basin structure to better support our clients and drive performance in each region, which is central to our fit-for-basin strategy. Additionally, we see the importance of digital transformation across all areas of our operations and workflows, and we are prepared to leverage this shift. Lastly, I believe that enhancing Production & Recovery will be critical as we work to improve the returns on our mature assets, alongside the transition from gas technology to midstream and new energy solutions. This focus on digital, production recovery, and energy transition will provide growth opportunities, allowing us to expand our margins and achieve returns above our cost of capital. That is our objective, James.

And then on the margin expansion comment, you're sticking to the getting back to '19 EBITDA margins by the end of '21. What needs to happen to drive that? Do we need market growth? Is it the cost-outs you've already taken? What are the kind of key things we should be looking for to ensure that that happens?

I think there are three elements. I think the first and foremost, and the one that has the most impact to date in our quarter results is the restructuring we have done when we adjusted our permanent structure and variable costs to the new normal and to the new level of activity as we foresee. And I think this has a significant amplifying impact on our return to margin expansion. So the second factor is a continuation of our strategic action in North America that aims at high-grading our portfolio and taking steps to make sure that we retain and continue to invest in the portfolio where we believe we can differentiate and create return above our threshold. And third is the leverage of our international footprint. So when you combine the core structural adjustments that we have done to lift and reset our earnings power, the action we have taken to enhance significantly our margins in North America, our play in North America, and international mix leverage, all of this will combine to elevate and gradually build our EBITDA margin to 20% of EBITDA of 2019. And we don't need much growth to achieve this.

So a little bit to James' question around the 2019 EBITDA margins. And would you say, number one, that digital is further accretive to that 20% margin and the return to that 20% margin that you saw in 2019? And do you think those margins are as normalized for Schlumberger this cycle, or could it be better? And then finally on that, as you said in your remarks, $6.6 billion in EBITDA on half the revenue, that's certainly above consensus estimates for '21 and '22. Can you give us further color there and a timeline?

Thank you for your question, Angie. Regarding digital, it is definitely accretive now and will continue to be in the future, positively impacting our margins. We aim to accelerate our growth rate to ensure that it is even more accretive on a larger scale down the line. As for the EBITDA margin from 2019, we are confident in our ability to reach an improvement to above 20% in the short term. The necessary mix involves international growth, our restructuring efforts, and our international exposure, all of which significantly contribute to this goal. You also inquired about our plans to exceed these figures. Our mid-cycle margin target is set above this level. Currently, we are operating close to the margins we had in 2019 and expect to continue our growth. We are focused on enhancing our international franchise, accelerating our digital initiatives, and maintaining capital discipline to refine our portfolio and address underperforming business units. By combining international growth, the advantages of digital, and disciplined capital stewardship, we have a formula to increase our margins beyond 20%. With half the revenue returning from 2019, we believe we can reach or surpass the previous EBITDA contributions. As for when this will happen, it will not be in 2021, but we anticipate that 2022 could mark the beginning of a period of international expansion. Following that, while it may take some time, we believe these improvements are within reach and are actively working toward this goal.

So one more on Liberty. Maybe you could talk about the transaction in a little bit more detail, the magnitude of the accretion opportunity, the access to the customer and well site without having frac and the determination of when you'll exit Liberty? Are you a medium-term owner or a long-term owner of those shares?

I'll let Stephane answer some, and I will answer on the customer engagement. Please, Stephane, on the transaction.

Yes, we are making good progress on our integration planning. We're finding additional synergies and opportunities for technology collaboration that enhance the value of this combination more than we initially expected. We are pleased to partner with Liberty and see significant potential in the combined company as synergies are realized and the market begins to recover. We will benefit from the recovery in North American unconventional resources, as our equity stake will increase in value, and we will also utilize our technology alliance with Liberty. It's too early to discuss monetization given our current position in the cycle, but it remains a possibility for the future. We have not established a timeline or target price for this, but it will always be an option. Regarding accretion, we have said it will be accretive from day one, so for 2021, we anticipate a positive impact on our EPS, EBITDA, and overall margins.

I can emphasize that our value proposition, particularly with Liberty in the market and among our current customers, is very robust with this platform as the largest pure-play frac company. We are establishing contracts and service-level agreements between both companies to share technology and create synergies, allowing us to enhance the Liberty workflow and the overall value proposition at well sites. We aim to integrate some of the contracts we have related to well construction into the frac operations. Clearly, we both stand to gain from this collaboration.

So digital, you've talked about digital being a core part of Schlumberger's growth strategy, and you stated the goal to double the revenue in the medium term. Curious kind of where acquisitions fit in that part as part of the goal. I asked this back in the '90s, of course, Petrel and ECLIPSE were crucial to your success that followed the 2000s, and it's still a big part of your offering. But more recently, you've announced kind of partnerships and venture-backed companies you're involved in. I'd like to understand a little bit more about your digital growth strategy as you build this business out.

Our strategy will focus on developing a digital platform for the industry, especially in the geoscience subsurface area, while enhancing our current desktop offerings and market strengths. We aim to build upon the open-platform foundation established with OSDU and create a shared data ecosystem within the industry. This transition to the cloud is expected to solidify our leadership in desktop solutions and generate growth opportunities through new transitions, similar to those we’re undertaking with Chevron, Suncor, and Woodside as we expand DELFI into the cloud. Additionally, we are looking into digital operations, which will further extend DELFI into drilling and production. We also plan to introduce Agora, a platform that facilitates integration of AI and edge applications on equipment, as demonstrated in our recent press release. This marks our expansion beyond core geosciences into operations. Furthermore, we are exploring the potential of AI to help our customers maximize their workflows by leveraging our platform to create value from their intellectual property and integration capabilities. We will continue to build partnerships as part of our platform strategy. When we identify gaps in our offerings in operations, geosciences, or AI, we will consider strategic acquisitions to enhance our capabilities and expand into areas such as New Energy or gas midstream using our established platform.

So Olivier, I think one of the struggles for investors is taking digital from a conceptual idea into real-life practice. And you mentioned Agora several times in the release today. I was wondering if you could talk about two things. If you can talk about Agora and the IBM Red Hat agreement, kind of two separate things here. Agora being more edge computing-driven, maybe you could just talk about kind of what is the best application? Where do you see that fitting in terms of your business? Like what's the most obvious application of where you can really make a difference? And secondarily, on the IBM Red Hat, you've targeted NOCs as being the customer. So what is that bringing to the NOC customer?

Agora enables us to integrate all types of equipment into our platform, allowing these devices to connect to the cloud. It provides an open platform where partners can implement applications, typically AI-based, to enhance the data feed. A prime example is the PETRONAS application, where a partner has deployed a video analysis tool on our platform, connecting it to the camera and using us as a gateway to the cloud. We supply a platform that customers license and install on their equipment, while their partners develop value-added AI applications that interface with the cloud in a secure manner. Red Hat OpenShift offers a variety of options for our customers regarding cloud deployment, allowing for hybrid cloud setups both on-premise and public. This addresses issues some customers face in certain countries regarding the inability to export data to the public cloud due to data residency concerns or their preference for in-house cloud infrastructure. Through OpenShift, we can deploy DELFI on private cloud infrastructures or non-public clouds, thereby reaching a significant segment of the market. Currently, about 50% of the market consists of countries that either don't have public cloud options or prefer not to use them for data hosting, and we are unlocking this substantial opportunity.

Olivier, I want to congratulate you and your team on making a quick adjustment in such a challenging situation. You mentioned the focus on Digital when you joined in September and reiterated it in January, and it appears to already be yielding positive results for you. Kudos on that swift change. My question is related to the recent discussions from major oil companies regarding their shift from traditional fossil fuels to greener options and renewables, with BP leading the charge. It seems that the clean energy business you launched in the spring has positioned Schlumberger well in line with the potential future spending plans of some of your existing customers. Could you provide some insights on how you see the clean energy business evolving over time?

I think, obviously, we see it's not only a trend that we want to capture with our existing customers. I think, obviously, some of our customer segments are transitioning into a different role as energy companies and want to add to that portfolio beyond oil and gas, including some technology and some renewables in which we also have interest. And I think at large, what we have realized is that we have a technology platform. We have an ability to deploy at scale technology. We have a subsurface knowledge. When you combine all of this, we believe that we have a market position that we can take, develop into the New Energy business, be it on renewable, be it on energy storage or be it on hydrogen. And I think this is where we are developing our venture today. We are developing it in geothermal, both low-heat and deep geothermal. That's very adjacent to our business because it exploits our subsurface knowledge, our drilling, well construction, and our ability to manage heat flows from subsurface to surface and provide digital platform to control it. So that's where we're heading. The hydrogen is very, very interesting for us because it's a huge opportunity, partially led by EU, with Green Deal and there are two avenues there. One avenue is the green hydrogen or electrolyzer where we believe we, with our new venture, Genvia, are in a position to create differentiated offering in the market to provide the market with higher efficiency and more versatile electrolyzer that can feed this 40-gigawatt capacity that EU is planning for 2030. And finally, I think we will continue to also look into CCS, which is again close to our core. But not CCS application for oil and gas, but CCS application to decarbonize the hard-to-abate sector, ammonia or SMR for hydrogen production through gas. And these are the sectors that outside of our oil and gas customers, that's where we believe we can add value. And when you combine all of this, this is a very exciting future with New Energy, and we are taking position today for the long run.

My follow-up question would be, Olivier, you mentioned the prospect for short-cycle projects to accelerate, especially in the international markets when heading out into 2022. And I know you don't want to get pinned down to any kind of specifics, but I'm just kind of curious how you would think about the magnitude of rebound. And again, you don't have to get too specific here, but just wondering how sharp of a rebound you would expect and maybe what geographic regions you would think would lead the way.

Yes. I believe the current level of investment in international projects is not sustainable for two reasons. Demand and supply will eventually rebalance, creating a global pull on supply, and this will affect both international and U.S. markets. North America is facing a setback that may lead to future supply gaps. I anticipate that short-cycle projects will recover first, followed by long-cycle ones. The timing and extent of this recovery will depend on the pace of oil demand. Customers are already reaching out for us to prepare for mobilization in the short to midterm, ensuring we don't reduce capacity beyond what is needed. I expect that low-cost producers, especially in OPEC+, such as the Middle East and Russia, will be the first to respond and rebound when the market improves. Additionally, we will see short cycles emerging in various regions. China is expected to continue its energy strategy without slowing down, and we will gradually see infield drilling and shallow water projects returning. Many projects are ready for final investment decisions that will expedite this return. There will be a sequence to this recovery, but short-cycle projects will start coming back both onshore and offshore, likely in 2021 and clearly into 2022.

Olivier, I want to come back to the renewables question. You highlight several interesting initiatives. Do you have an aspiration for renewables to be a certain percentage of revenues by, pick your year, 2025, 2030? And just given your scale, what does this mean for CapEx spend, R&D spend? And overall, how do you think about balancing a desire to see, what I believe would be your desire to see a measurable portion of your revenue stream becoming leveraged to renewables while also continuing to drive improved financial performance?

Yes, absolutely. I think it's too early to specify a number. We are currently developing our strategy further. I wouldn't label it as purely renewable; it's more than that. It intersects with renewable energy, but it involves a technological approach. We do not plan to invest in wind farms or pursue capital projects in that way. Instead, our goal is to strengthen our position as a technology partner for renewable companies and our existing customers while addressing emerging markets like the hydrogen economy. We aim to establish a meaningful presence and scale within the next decade. At that time, we want to diversify our portfolio and capitalize on growth opportunities, ensuring we maintain a technology-focused service and solution offering for the market. This is a long-term goal supported by short-term investments that help us create unique market positions, which we will expand on in the years to come, particularly where we see the most potential.

And I just want to circle back on the 20% EBITDA margin target for next year. You did about 19% in 3Q and what I imagine is likely close to 20% ex the to-be-divested businesses. It just seems that 20% is easily achievable, if not beatable, next year. But what am I missing? Is there still some concern around pricing as contracts roll into next year? Is there some concern that maybe customer spending abroad won't lift that much over the course of '21? So why shouldn't we consider the 20% EBITDA margin a relatively low bar, just given your 3Q performance?

No. First, we are setting a full-year target that we expect to achieve before the end of 2021. We believe that the gradual recovery throughout the year will allow us to establish a target at this level or higher. Do we foresee more pricing adjustments? No. The pricing pressure has been ongoing for the past six years. As I mentioned earlier, the industry has been facing significant challenges, and we have been offering too much. The industry is now starting to understand the limits of what can be given away, and we are collaborating more closely with our customers to find ways to eliminate inefficiencies. While large integrated contracts will still be competitively priced, we are leveraging performance, technology, and strong engagement with our customers to counteract pricing pressures and maintain margin stability. Pricing challenges will continue, particularly with large integrated contracts, but I believe that once activity picks up, we will have the opportunity to adjust our pricing appropriately in a favorable market.

So, Olivier, I think the energy transition topic naturally kind of begs the question about the outlook for international E&P spending in the coming cycle. I appreciate your earlier comments on the cadence of how work will come back, say, next year. But what's also going to be different in this cycle is that your customers have additional calls on their cash flow that are being prioritized before upstream spending, right? IOCs are diverting more capital towards renewables, that's the plan. Independents have a first call on their cash to their balance sheets. I'm just curious how those factors influence your expectation around the international spending cycle and specifically offshore, as IOCs control most of the, specifically deepwater, acreage globally.

Yes, that's a correct assumption. And I think we believe that what will happen is that the market will consolidate around basin's position that each of the major and large independent will concentrate on their basin plays and other strengths. And we— believe that we have to be smart about aligning with our customers in those key basins, be it around their core assets, such as Exxon in Guyana, such as some other IOCs in Brazil or in East Africa. We will make sure that we align ourselves with those so that we maximize the uptake of market position in those basins and continue to execute our fit-for-basin and engagement with customers to make sure we maximize those positions. So that's the first thing we want to do. Next, I will comment that the national oil company are part of the mix, and I think the deepwater is indeed more domain where international companies dominate. And I think we have there a very strong position. But from shallow to land, there is a lot of activity that is pulled, both short and long cycles, by national company. And in the Middle East, most of the offshore activity, if not all of the offshore activity, is led by national oil companies and is growing fairly well and has been more resilient than the land activity. So we will hold on those positions and make sure we continue, as we have seen some contracts have been awarded in this domain continue to post this. So we understand that the market will be structurally different than what we could have anticipated five years ago. But we believe that the position around key basins of strength from our customers and aligning ourselves with this will provide us the opportunity to capture most of this international growth coming back.

And then I want to touch on Reservoir Characterization as well, and that segment has experienced a lot of volatility in its margins the last couple of quarters, much more than we've seen historically. I'm just curious how you'd characterize the gravitational center for those margins once the business has cost reductions impacted, et cetera. How do you think that business looks like on a full-year basis once we get it through these near-term challenges?

I think the comment I will offer on this is that this market is a market where the exploration market sits. And the exploration market is set from discretionary spend and it includes the multi-cloud sales that historically have been a little bit of a swing that depends on the season and depends also on the exploration discretionary budget that is available for our customers to invest in future exploration acreage. So that has left a little bit of variability. The variability has been bigger in recent times because the proportionate scale of exploration has reduced. Hence, when exploration campaigns come back, which happens every other season, and when the discretionary spend on exploration through multi clients combine to create a very strong quarter. But at the base, the related testing, wire line, and digital are still performing very well. Software was growing this quarter, one of the very few product lines that did grow quarter-on-quarter and did grow as an example. So, expect this to be the consequence of most of the exposure we have on discretionary exploration spending and the exploration campaign viability that we see quarter-on-quarter. This is the most rationale for this more than any core issue we will have in any of the product lines that are there. Now commenting on the future, we will not comment anymore on Reservoir Characterization, as we'll comment on the new Divisions that we are setting in place. And part of it will be in digital, part of it will be in Reservoir Performance Division. So, you will get more detail on this in the coming months.

First question, just a little bit of a clarification, sorry if I missed this. But I believe your opening remarks on the outlook suggested flat quarter-to-quarter in the fourth quarter. Is it fair to assume that, that applies at the EBITDA line, so just north of $1 billion?

That's a fair assumption. I think we have some favorable and unfavorable play that we believe will balance out, and the ambition will be indeed to maintain roughly both the margins and the dollar, on an all about flat.

And then secondly, I wonder if you could just give a little more detail on the progression for the cost savings. I guess you're exiting about 80% in the third quarter. It should be almost done in the fourth quarter, that's maybe $60-ish million incremental. Should we think there's much left in 2021 from that and is that international or, I imagine that's mostly international basis? But is there any progress there in North America as well?

Yes, I'll take this, Chris. We were above 80%. There is still some remaining to address, particularly in international markets as we move into Q1. North America is mostly complete. You can expect a bit more progress in Q4, but some will carry over into the first half of next year. Does this answer your question?

And just to finish up on that restructuring. So, the cost of those savings is pretty light compared to expectations in the third quarter, around $273 million. Do you think those costs would be higher in the fourth quarter? I think expectations are near $1 billion for the second half. So, will the cost of savings be much higher in the fourth quarter?

Yes. It's not an exact science there, to be honest. The cash outlays, they get spread out. It could be a little bit higher in the fourth quarter. However, the cash flow from operations, traditionally in the fourth quarter, also increases. So, I think we could very well end up with free cash flow, including severance, still quite positive. And if everything goes well, it could even be higher than in Q3, even though we have higher severance potentially.

At this point based on the dialogue that you're having with your international customers, of course, international on a pro forma basis is going to be 80% of revenues once we consummate OneStim. But you mentioned strong customer engagement with regard to the dialogue that you're having for international. At this point, do you think international revenues in 2021 are up year-over-year?

We are currently assessing the level of activity by using the second half of this year as our baseline. The reset for international oil companies occurred in the second quarter, for independents in the second and third quarters, and for national oil companies in the third quarter. Therefore, the adjustment in activity has taken place over the last six months. We believe we have now stabilized, as observed in recent weeks, and aside from any seasonal effects, we do not expect any structural changes in the short term. This stabilization serves as our baseline. From this point, we anticipate seeing growth and a gradual recovery. Comparing year-on-year, particularly from the first quarter of this year through the international mix of the second quarter—and considering the significant effort to boost supply in the Middle East early in Q2—does not seem realistic. We need to use the second half of this year as a baseline for our projections and build upwards from there.

Fair, but the COVID-related disruptions that you witnessed in Q3, I would assume, hopefully, are not going to be as acute in 2021. But moving on, with regard to your high-grading of your portfolio, we have announced OneStim and low flow. I'm just curious in terms of what are the most tangible high grading opportunities remaining in your portfolio.

I think we'll continue to focus on each and every business line we have operating in North America. We have already made effort to rationalize and to make sure that we operate in the basin of North America, where we believe we can sustain a differentiation and participate fully going forward. We have made a choice to accelerate some technology access and fit-for-basin in some part of our portfolio to high-grade their performance. So, I will say that all of our portfolios, the entire business line, I would say, have opportunity to improve their returns by tuning. And I think what we have done on structural reset is lifting. And the business line has improved this quarter beyond OneStim; the performance of North America business line this quarter has improved. So, we have a way to go to further improve this and to target our recovery of margin in North America. And I will say that we do that on both the growth for the market where we have strong alignment, the well construction, the production recovery, the digital and we do that on the bottom line, where we continue to use technology access or restructuring to make sure that we execute with the return we desire in North America. So, we'll continue to gradually improve the performance, that's our goal.

What I meant by high grading, though, was additional disposition opportunities in your portfolio.

I will not comment on that. I think we continue to look at every portfolio and we look at it from the light of does it bring us the growth and accretive return opportunity in the long run, or do we have a better way to monetize and to be occasionally opportunistic about this portfolio? So, this is true for those portfolios there and as well as in other markets. But we'll continue to look at it and we will be disciplined to make the right decision for the shareholder here.

I was wondering, maybe a higher level one to close it out here. So, we're about to get to look at your new reporting structure. And I know that Digital & Integration is probably the one that you have the most excitement about growing and improving earnings from. But if we remove that from the equation, when we take a look at what you guys are doing in, say the third quarter in the Reservoir Performance, Well Construction, Production Systems, et cetera. Where would you sort of point us to in the near term? And by near term I mean over the next 12 to 18 months here. Where would you see the greatest opportunities for improvement in earnings? And would you say that, that is more driven by costs or more driven by select growth opportunities in those portfolios?

No, if we exclude diversity and inclusion, which both have opportunities for margin expansion and growth through digital advancements, I believe we can focus on Well Construction. We expect our market position to gain from the resurgence in global drilling activity. The efficiency of our platform and the integration capabilities we've developed in Well Construction will play a crucial role. This presents an opportunity to reinforce our leading position in the market and to leverage economies of scale. In Reservoir Performance, we leverage our subsurface expertise alongside our unique services, which enhance exploration, development, and production interventions. Our technology and specialized knowledge will be essential as the market seeks to optimize existing assets and identify new tie-back opportunities or extend the life of current assets. We possess outstanding reservoir performance technology. Lastly, regarding Production Systems, this represents a growth narrative. We're looking to expand our horizons beyond our current offerings and venture into the midstream sector. This involves tapping into the gas market potential, connecting wells to subsea units and the surface to create a uniquely integrated production system enhanced by digital technology. We aim to recover through our Production Systems and Reservoir Performance offerings, which we intend to present to the market.

All right, that’s helpful. I’ll leave it there. Thank you.

Thank you very much, Connor. So, thank you, everyone, for having attended this call. So, before we end this call, I would like to leave you with four key takeaways. Third quarter was another quarter of operational and financial outperformance, made possible by discipline in execution. We made significant progress on the execution of our strategy, with key milestones in restructuring, North America strategy, and expanding the reach of our digital platform. The reset of our earnings power is progressing very well. We anticipate significantly improved operational leverage when we put the trough behind us and activity rebounds, providing us with a platform to materially expand our EBITDA margins and earnings. The quarter was another strong free cash flow performance in the cycle trough, a meaningful step closer to our double-digit free cash flow ambition that will support our priority on deleveraging our balance sheet. Lastly, the deployment of our new customer-focused organization and our fit-for-basin approach provide us with a great platform to capitalize on the market recovery and deliver on this path. In conclusion, we are executing our performance strategy and we are determined to continue taking bold actions to secure resilience and reposition ourselves as clear leaders—both in performance measured by our customers and in returns measured by our shareholders. Thank you.

Ladies and gentlemen, this concludes our call. Operator, you may now disconnect.