SLB (SLB) — Q2 2021 Earnings Call Transcript

Thank you, Lea. Good morning, and welcome to the Schlumberger Limited Second Quarter 2021 Earnings Conference Call. Today's call is being hosted from Paris, 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. 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 second-quarter press release, which is on our website. With that, I will turn the call over to Olivier.

Thank you, and good morning, everyone. I appreciate you joining us for the call. Today, I will discuss three topics: our second-quarter results, the current industry macro environment, and the outlook for the third quarter and the remainder of the year. I will also share my view on how Schlumberger is positioned for sustained outperformance in this economic context. After my remarks, Stephane will provide further details on our financial results, followed by a question-and-answer session. Our second-quarter results showcased broad strength across our core portfolio, as we capitalized on both short- and long-cycle activity recoveries across various divisions, operating environments, and geographies, including North America and international markets. The combination of high-quality revenue, strong execution, and improved operating leverage resulted in our fourth consecutive quarter of margin growth. Let me highlight some performance metrics from the quarter. Internationally, our diverse portfolio enabled us to capitalize on the recovery in the second quarter, restoring margins to pre-pandemic levels ahead of the expected acceleration in these markets. In North America, we met our goal for double-digit margins, marking a key milestone in our 2021 financial objectives. Every division benefited from the activity recovery, posting sequential revenue growth and notable margin enhancement, including Production Systems, which achieved double-digit margins this quarter. Reservoir Performance and Well Construction led the growth and margin increase, both realizing gains internationally and in North America. Reservoir Performance's growth stemmed from exploration and seasonal recovery, increased offshore activities, and the adoption of new technologies, resulting in margin expansion of over 370 basis points. Well Construction accelerated its growth pace, outstripping rig count growth both in North America and abroad, with significant contributions from offshore basins. In U.S. land, this division grew over 30%, double the sequential rig count growth rate for the quarter, reflecting improved market engagement and revenue quality. Additionally, our cash flow from operations reached $1.2 billion, allowing us to begin reducing our debt this quarter. There were two key contributors to our financial outperformance: the offshore activity mix and technology adoption. The offshore recovery saw high single-digit growth in deep-water activities, particularly in Brazil, along with a mid-teens growth in exploration and appraisal activities across Europe and the Middle East. As customers commit to future offshore developments, we secured significant deep-water contracts for our OneSubsea business line, doubling booking volumes from the previous quarter, with a year-to-date book-to-bill ratio above 1.5. Another contributing factor was the increasing adoption of new technology, which rose by one-third this quarter, particularly in Transition Technologies and digital and fit-for-basin solutions, benefiting all divisions and most basins. This underscores the performance enhancements our technologies provide to our customers, boosting our confidence in their contribution to margin expansion during this upcycle. We are also advancing our digital and new energy strategies, extending our digital platform's reach through key agreements as customers migrate towards digital transformations. In new energy, we are making progress on all our ventures, including our recently announced partnership with Panasonic North America to develop our new battery-grade lithium production process in Clayton Valley, Nevada. Moreover, we declared our commitment to achieving net-zero greenhouse gas emissions by 2050. I take pride in leading the first service company to set this net-zero target, which includes Scope 3 emissions. We've crafted a science-based approach to climate change, aligned with the Paris Agreement's 1.5 degrees Celsius target, complete with a roadmap and interim milestones for 2025 and 2030. As a company focused on technological innovation, we aim to offset the emissions we produce by 2050 with carbon-negative initiatives. This plan includes launching our Transition Technologies portfolio to assist our customers in their net-zero pursuits, such as flaring avoidance with Ora wireline technology and the successful CYNARA CO2 membrane separation technology. Our net-zero ambition and Transition Technologies launch offer a chance for us to contribute to the industry's decarbonization, driving innovation for a resilient and valuable future with lower carbon footprints. In summary, I am very satisfied with our revenue quality, strong execution, increased market participation, and notably, translating these factors into yet another quarter of margin growth. I extend my gratitude to the entire Schlumberger team for delivering excellent performance for our customers and communities, despite the ongoing impact of COVID in various regions. Next, I'd like to discuss the macroeconomic environment supporting our industry. Although the emergence of the COVID-19 Delta variant and its accompanying disruptions may affect the speed of economic reopening, recent market forecasts point to an improving global economic environment. Global GDP growth is projected to reach nearly 6% in 2021 and over 4% in 2022, fueling a steady recovery in oil demand. This outlook is backed by recent updates on oil demand, which indicate expectations for broader recovery as vaccination efforts progress, mobility improves, and additional fiscal stimuli are implemented in significant economies during the latter half of the year. Looking further ahead, the IEA anticipates global oil demand will rise to 100 million barrels per day and surpass pre-COVID levels by the end of 2022, provided no additional policy changes occur. If oil prices remain elevated, the supply response to this demand recovery is developing as expected, driving short-cycle production and leading to an increase in long-cycle projects as seen in new FIDs and encouraging recovery in offshore development and near-field exploration activities during the second quarter. In North America, this supply response is evident in rig count and frac fleet trends, showing sustained growth in the first half of the year. Private operators are leading activity growth, driven by accelerated completions of DUCs and heightened drilling activity for DUC inventory replenishment. Conversely, public operators continue to exercise capital discipline, which is evident as the rig count remains significantly below the Q1 2020 total, even as WTI prices exceed pre-pandemic levels. In this scenario, while we expect solid activity growth, we believe the North American market will be structurally smaller than in past cycles due to capital discipline and industry consolidation. In international markets, the ongoing investment deficit required to meet oil supply needs presents a sustained growth opportunity, particularly in low-cost, advantageous basins. We remain positive about the structural demand for international supply and its impact on activity, which was already apparent in the second quarter through strong seasonal rebounds and offshore recoveries, despite COVID disruptions affecting parts of Asia and the Middle East. This quarter also marked the second consecutive upturn in international rig counts. Looking further ahead, we anticipate favorable conditions for durable investment growth driven by actions from NOCs, international investments from public E&P operators, and expected continued supply discipline from OPEC+, all in response to consistent demand growth. The pace of international tendering contract awards and our increasing book-to-bill ratio supports this view. In this context, Schlumberger is exceptionally positioned in both international and North American markets. Our exposure is geared towards accretive growth, and with several recent contract wins, combined with our advanced digital and fit-for-basin technology portfolio and performance strategy, we will create value for our customers and achieve industry-leading returns. Looking at the outlook for the third quarter, we anticipate growth in North America, although it will moderate somewhat in U.S. land, led by private operators engaging in horizontal oil drilling and a seasonal rebound in Canada. The North America offshore market should remain resilient, although we will keep an eye on the hurricane season. In the international arena, we expect continued positive growth momentum through the third quarter across all segments. Short-cycle activity will be complemented by the commencement of longer-cycle projects. Accordingly, we expect our global revenue for the third quarter to grow in mid-single digits, driven by the Reservoir Performance and Well Construction Divisions, while our pretax segment operating margins should further increase by 50 to 100 basis points. With this third-quarter outlook, we maintain confidence in achieving double-digit growth internationally in the second half of 2021 compared to the latter half of 2020. Therefore, barring any setbacks from COVID affecting operational recovery, we anticipate full-year revenue growth both internationally and in North America, excluding divestiture impacts. With the ongoing activity recovery projected through the third quarter and solid indicators of a lasting recovery beyond that, we can see a clear trajectory toward the high end of our full-year EBITDA margin expansion guidance for 2021. Looking further ahead, the fundamentals remain very promising, with a robust economic rebound, supportive oil prices, and a positive demand and supply outlook creating a unique set of conditions that will foster exceptional growth cycles. This growth cycle is expected to be broad-based across different geographies and operational environments, including land, offshore, North America, and particularly international markets. The second quarter serves as a strong indication of future prospects and underscores our restored earnings potential under these circumstances. In conclusion, I am very pleased with our strong second-quarter results across our entire portfolio, which reflect the effectiveness of our strategy in achieving our long-term financial goals.

Thank you, Olivier, and good morning, ladies and gentlemen. Second quarter earnings per share was $0.30. This represents an increase of $0.09 compared to the first quarter of this year, and an increase of $0.25 when compared to the same period of last year, excluding charges. There were no charges or credits recorded during the first or second quarters of 2021. Overall, our second quarter revenue of $5.6 billion increased 8% sequentially. North America revenue increased 11% sequentially, while international revenue increased 7%, both outpacing respective rig count growth. Pretax operating margins were 14.3% and have now increased four quarters in a row. This represents the highest margin since the fourth quarter of 2015. Notably, margins expanded sequentially across all four Divisions. This performance was driven not only by the seasonal rebound in the Northern Hemisphere, but also a favorable revenue mix as a result of increased offshore activity, new technology adoption and increased exploration and appraisal activity. Company-wide, adjusted EBITDA margin of 21.3% for the second quarter increased 118 basis points sequentially and is the highest since the third quarter of 2018. I am very pleased with this margin performance, which reflects the benefit of significant operating leverage we have created through the combination of the high-grading of our portfolio and our cost reduction program. This performance also gives me the confidence that we will continue to increase margins in the third quarter and beyond. Let me now go through the second-quarter results for each Division. Second quarter Digital & Integration revenue of $817 million increased 6% sequentially, while pretax operating margins increased 147 basis points to 33%. These increases were primarily driven by strong digital solution sales. Reservoir Performance revenue of $1.1 billion increased 12% sequentially. This revenue growth was entirely driven by higher international activity, which resulted in international revenue increasing by 13%. Margins expanded 373 basis points to 13.9%, largely due to the seasonal recovery in the Northern Hemisphere and increased offshore and exploration activity as well as favorable technology mix in the Middle East and Africa. Well Construction revenue of $2.1 billion increased 9% sequentially, while margins increased 209 basis points to 12.9%. These improvements were driven by strong performance both in North America and internationally. U.S. land revenue grew by over 30%, significantly outpacing the increase in rig count. International activity increased beyond the seasonal rebound as many countries experienced double-digit revenue growth. Finally, Production Systems' revenue of $1.7 billion increased 6% sequentially, and margins increased 146 basis points to 10.2%. These increases were primarily driven by higher activity in Europe, Africa and North America. Now turning to our liquidity, during the quarter, we generated $1.2 billion of cash flow from operations, and positive free cash flow of $869 million despite severance payments of $72 million. The amounts included a receipt of $477 million U.S. federal tax refund relating to prior years. This refund helped support our deleveraging efforts during the quarter. In this regard, our gross debt decreased by $861 million during the quarter. We have begun to execute on our commitment to deleverage, as demonstrated by the early redemption in June of all $665 million of notes that were coming due in September. We also repaid $236 million of commercial paper during the quarter. Net debt decreased sequentially by $632 million to $13 billion, the lowest level since the fourth quarter of 2017. During the quarter, we made capital investments of $351 million. This amount includes CapEx, investments in APS projects and multi-client. For the full year of 2021, we are still expecting to spend between $1.5 billion to $1.7 billion on capital investments. In total, during the first half of 2021, we generated over $1.6 billion of cash flow from operations and over $1 billion of free cash flow. These amounts are fully expected to increase in the second half of the year, consistent with historical trends. As a result, we remain confident in our ability to achieve double-digit free cash flow margin for the full year of 2021 and beyond. This will allow us to continue to deleverage the balance sheet and provide us with flexibility in our capital allocation. One last item worth highlighting is that during the quarter, we replaced our EUR750 million credit facility with a new three-year EUR 750 million sustainability-linked revolving credit facility. The terms of this facility are aligned with the interim emissions reduction targets disclosed as part of our net-zero emissions commitment announced this quarter. This is a first for Schlumberger and further demonstrates our commitment to fully participate in the decarbonization of the industry. I will now turn the conference call back to Olivier.

Thank you, Stephane. I think we are ready to open the floor for questions. Thank you.

Hey, good afternoon, Olivier and Stephane. So Olivier, really strong performance and execution in the second quarter, kind of across the board and really strong margin performance, I thought. What's the sustainability of this type of margin improvement as we go through the back half of this year, and in particular, probably out in 2022 when things really get going and the cycle really takes off?

Yes, thanks, James. You are right. We are very proud of our margin expansion. There were several factors to consider, starting with the second quarter and then looking at how we believe we can maintain this margin growth. First and foremost, our performance was driven by revenue growth, which met or exceeded our expectations both internationally and in North America. I want to credit our team for their customer focus, the new organizational structure, and our overall performance. Secondly, we experienced significant operating leverage and operational efficiency during the quarter, which we expect will form the foundation for future margin expansion. This was evident across all divisions, particularly in Reservoir Performance and Well Construction. Thirdly, the quality of our revenue was enhanced by a favorable mix of activities resulting from a seasonal rebound in certain areas, including beneficial offshore activities and a rise in exploration and appraisal work, which saw mid-teens growth quarter-on-quarter in the second quarter. Together, this represents a unique revenue mix quality. Additionally, we benefited from the adoption of technology connected to our fit-for-basin solutions that are proving successful for our customers. Digital advancements and recent technology transitions are also contributing positively to our revenue quality and margins. Lastly, in North America, we are beginning to see promising signs in pricing for Well Construction. Looking ahead, while the seasonal rebound may not occur every quarter and the unique exploration and appraisal uptick is unlikely to repeat, we are confident that we can capitalize on future industry growth, both in North America and internationally, to leverage our operational efficiencies, favorable mix, and technology adoption to drive ongoing margin expansion.

Right, okay, good, it certainly provided a good glimpse into what the renewed earnings power of Schlumberger is. Perhaps if we could touch on Digital for a second, because it's kind of in a league of its own at this point. The technology adoption seems to be continuing to be strong and maybe accelerating. Margins were a little bit ahead of at least what we were expecting. What is your outlook there on the Digital side as we go through the next few quarters, especially again in 2022 and 2023?

I think the progress we made this quarter was twofold. First, progress on our platform strategy. We continued to complete the platform foundations, the partnership, the enablement that give us extended market access such as what we are using from the IBM/Red Hat technology to access hybrid clouds and unlock, if you like, about one-third of the addressable market by this hybrid cloud and in-country solution we provide. And I think we have made much progress there, and I think we are in the eighth or ninth inning, if you like, on the platform readiness for full scalability and expansion. And we made progress on the adoption of DELFI as you have seen some announcements, and we continue to progress on rolling out for accounts that have already adopted DELFI. Hence, our revenue on the DELFI and the new technology of digital was significantly accretive to our growth, significantly accretive to D&I, and resulted into margin expansion flow-through that was visible this quarter. So that will not continue to be the same every quarter. It depends on the seasonality and on the specific, but expect directionally to continue to grow.

Okay, great. Thanks for that.

Thank you, James.

Hi, good afternoon, Olivier. So clearly, we're starting to see the international upstream market starting to pick up, as you noted double-digit increases in many countries. I noticed you didn't mention Saudi, which I would expect to start to pick up in the coming months. So when do you think that piece falls into place? And how do you see the cadence for Middle East activity through the end of this year? And kind of what does that mean for '22 growth? I would think that kind of, at this point, I'd be surprised if growth wasn't up at least double digits internationally, especially with the positive commentary around offshore. Just wondering if you could comment, please.

Yes. First, in short term, I would like to reiterate my positive commentary on the second quarter growth. It was all basins, all divisions internationally. So, it was broad and inclusive of Middle East. Now in the context of the Middle East in particular, the growth was maybe more muted or less aggressive and less accretive to the overall growth than other basins, and there are a couple of reasons for that. And the first and foremost reason is related to the supply constraints that are still outstanding on back and as such muting some of the short-cycle activity that we could have expected to rebound faster. So now going forward, there are a couple of factors that will play favorably short term and midterm. Short term, there will be a relief of some of these supply constraints that will continue to inch up the short cycle activity including Saudi. There is a commitment in Middle East for gas development. And I think Qatar was the first to expand their commitment, and we have benefited greatly from that rebound in activity for the last couple of quarters, and this will extend also to a couple of other countries, including Saudi. And lastly, as we turn into 2022, you have heard some signals from a couple of countries in GCC that have signaled that they will commit to production capacity increase to fulfill their opportunity to gain share as there will be a pull on international supply. So this will result from 2022 in combination of short cycle gas development, and long cycle across that region. And hence, they will catch up, and they will certainly be a region that will lead the activity growth and will support in the second half our double-digit year-on-year H2 and next year into strong growth going forward.

If we look a bit further ahead, you mentioned that EBITDA is expected to exceed 2019 levels, even with only about half of the lost revenue returning. I'm curious if there have been any updates on that perspective, particularly regarding the timing of the revenue recovery or the EBITDA figures. Has anything changed in that long-term outlook we’ve been considering?

No. Certainly, with the results we just reported, we are more confident in our ability to achieve and enhance our margin as the cycle progresses. Over the next two to three years, we see a strong case for a double-digit growth floor with the potential for upside. Our contract wins and market position will support this additional growth moving forward. Moreover, operational leverage, the activity mix including offshore, and the adoption of digital technology will all contribute to expanding our margins. The goal we have set to recover the net EBITDA dollars with about half of the revenue recovery remains valid. Additionally, our ambition to visibly expand the margin during the mid-cycle is very much in effect.

Okay, thank you, Olivier.

Thank you.

Hey, good morning, everybody. I guess the first question…

Hi.

Good morning, Olivier, first question, I just kind of wanted to ask about inflationary pressures. Obviously, supply chain seems to be tightening across the industry. We hear about raw material cost inflation. So maybe if you could just take a moment and talk about your ability to kind of control the supply chain and control cost or either pass along cost on the OFS side and also on the Cameron side as well.

Now it's a very valid question, and it's something that we observe, and some facts and some trends that has materialized in some indices going up. But I believe that the toolbox we have, and professional and very expansive organization we have in our planning and supply chain and manufacturing organization that are used to manage some inflationary pressure has allowed us to mitigate and hedge at this inflationary pressure and contain cost inflation into under our rules. Now when and as this happens and on the specifics of logistics or specific material, we are engaging with our customers using the contract terms we have, to leverage an adjustment, and we have done so successfully with several customers. So we are confident that the combination of our supply chain capability with global and local leverage and the customer-centricity engagement approach we have, ability to sit and discuss the commercial terms give us the ability to support this and continue to drive forward and expand our margins.

Awesome. And a quick follow-up here, probably for Stephane. When we think about free cash flow, obviously, it's going to be accelerating as you get into 2022. You'll be doing deleveraging, as you talked about, paying down some debt. But at what point should we think about incremental cash coming back to shareholders, probably a dividend bump first, and then maybe buybacks. But is there a certain leverage ratio that we should be looking at or thinking about you guys targeting before you kind of think about increasing it?

Yes, yes, Chase, we do have a target leverage ratio at this stage. It is going down to less than 2 times net debt-to-EBITDA. Now with our strong cash flow performance and the EBITDA expansion, we are quite confident that we can achieve this target sometime by the end of 2022. Now we will, of course, need to continue investing in our core business to fully reap the benefits of this growth cycle, but this will be done with the same discipline we are exercising today and within the target range of 5% to 7% for the operating part of our CapEx, i.e., excluding APS and multi-client. Accounting for this, however, we will still generate significant excess cash flow throughout the growth cycle. This is, of course, very good news. It gives us optionality in our capital allocation, particularly to execute our strategy and to fund our new horizons of growth. Now whether it relates to our core portfolio or expansion into digital or new energy, any new investment will be looked at under the strict lens of our return-based capital allocation framework. Beyond that, indeed, we will continue to review our shareholder distribution policy based on the sustainability of cash flows and potential exceptional cash inflows, for example, proceeds from divestiture. So this is where we will take it.

Perfect. I'll turn it back over. Thanks everybody.

Yes. Good afternoon. Great quarter.

Thank you, Scott.

So just as a clarification question to start, the 10% free cash conversion rate relative to revenues, we should be including the tax refund when we think about the conversion rate for the full year. Is that correct, Stephane?

Yes, you should actually. But you have a few offsets, and not necessarily in the same quarter, but we continue to pay severance payments. I'm talking about offsets to the tax refund, Scott. So we continue to pay severance payments with the tail end. The process is finished, but there are still payments coming. So when you put all of it together, the tax refund is not fully a plus. Now excluding the two exceptional items going opposite way, tax refund and severance, we can actually still generate the 10% plus free cash flow margin. So we should be exceeding now that we have the tax refund for sure.

Yes. Got you. And then I was actually surprised to see the Well Construction share gains in the U.S., it's super impressive. Was that kind of a one-time catch-up just with high oil prices, customers now willing to pay up for your technology? Or do you see continued share gain potential onshore, whether it's Well Construction or elsewhere, even in light of private really driving the growth? Are you seeing gains with private? Just some color on U.S. share gain potential would be great.

We are very proud of this achievement, and I would like to highlight three key drivers of our top line growth. First, our execution performance has led to gains in market share for cementing, drilling, and directional drilling with both private and public operators in the U.S. Second, as part of our North America strategy that we initiated two years ago, we enhanced our technology access, allowing local directional drilling companies to rent or purchase our fit-for-basin technology for their local clients, primarily private ones. This has been a consistent growth driver, helping us expand our market share beyond what our service arm could achieve. Finally, we have seen increased demand for our directional drilling equipment, which has allowed us to maintain a pricing premium. The combination of these factors has resulted in over 30% quarter-on-quarter top line growth, significantly surpassing rig count growth. While there are always exceptional circumstances, I anticipate this positive trend, especially in gaining market share, will continue moving forward.

Very impressive. Good to hear. Thanks for the color.

Thank you, Scott.

Yes, thanks. I wanted to ask about labor. Obviously, you had to take the challenging decision to reduce your workforce dramatically last year. I'm curious as we now look back towards growth, how well positioned are you to capitalize on the market demand? Do you have excess labor? Do you need to hire substantially? And I'm particularly curious in international regions where you may have some more long-cycle constraints on that.

Yes, it's a very good question. It's something that we're working out to continue to make progress. But I think in a nutshell, I think the step change we did in some of the operational environments, our operational practice, including digital operation, has given us the opportunity to respond on the first peak of this cycle without deploying the same resource set as we have in the past, hence, getting direct efficiency gain as we mobilize and grow with the cycle. Going forward, and already initiated in some geographies where we had more than double-digit growth, as I mentioned, we had access to some resource that we onboarded during the quarter to respond to the contract we are winning. So the long cycle nature of international gives us a bit more long-term visibility to this condition. Hence, our market approach is to target specific geographies and business lines where we believe we can be generating accretive returns and growth and prepare for it by mobilizing ahead the resource or moving resource to address those. So I think we have a global access to talent. We are using a lot and at scale this remote operation. So it is a challenge for us to respond to high demand, but we believe that we have the operational environment to make it a success.

Thank you. That's helpful context. Sort of a similar question, but on the steel or equipment side of things, basically, I'm wondering if you could, based on your expectations for how much activity will grow over the next, call it, 6 to 12 months, as you look in some of the more differentiated markets and more consolidated supplier markets, call it Middle East, offshore, et cetera, do you feel that there is adequate equipment to meet continued growth beyond that point? Do you feel the capacity will be tightening significantly? Just appreciate an update there. Thanks.

I think in the early part of the cycle, I think we will use and the industry will use the excess supply that came from the compression of activity that came for the last two years. But again, we have very much professionalized our planning and supply organization. And I think from the Cameron to the asset that we have to deploy, I think we are trying to take a long-term view and scenario-based view on the future, looking beyond the 12-month horizon, and I'm starting to prepare and put some options so that we can respond to this growth going forward. Early part will not necessarily create a tightness, but the mid-cycle for sure, before the mid-cycle, this will create the condition for tightening supply and hence, some pricing conditions.

Thank you. I will turn it back.

Thank you.

Good morning, team. The first question is around portfolio optimization. Perhaps you guys can weigh in on how you're thinking about the path for asset monetization, thinking Canada, maybe the Middle East? What are the opportunities? And how large could the asset sale market be for Schlumberger?

So, Neil, we are making progress on the divestitures we announced last quarter. For the APS asset in Canada, we have over 10 parties actively reviewing information in our data room, and we expect to receive first round offers by the end of next month. The good news is that the economic conditions are improving, and we are optimistic about achieving a successful transaction. Similarly, the Middle East rigs are also on track; we are in negotiations with shortlisted bidders, and due diligence has been completed as planned. These are the two divestitures where we hold equity positions and have future monetization options, such as our stake in Liberty, which we will evaluate regarding timing and scope when the time is right.

Yes. Great. And then I would appreciate some of the comments you made on Saudi broadly, but maybe you could just step back and talk about OPEC+, including other regions within that cartel or in the plus side of OPEC. How are you seeing activity trends here? And what role do you think Schlumberger is going to play in terms of building out capacity that they are talking about?

I think, first, we have, I'll say, a privileged market position with most of the NOCs in this OPEC+ consortium. We have seen across the broad spectrum of these NOCs' activity starting to build back, seasonal rebounds playing strongly in Russia. And we expect, as I said, this short cycle to recover for the next two to four quarters as the demand will be lifted, as the constraints will be lifted, and we see that more than one or two countries will actually commit to this capacity expansion. And we have the footprint. We have the relationship. We have the fit-for-basin to leverage and then to respond to this capacity buildup and this growth opportunity in those, from Russia to the Middle East, particularly. So I feel confident that these market share pursuits, that as the market comes back from '22, '23 will be giving us an opportunity to leverage our market position and move up.

Thanks.

Thank you.

Yeah, good morning. Maybe just to follow-up to Neil's question on NOCs, I guess you're seeing some positive activity trends from the NOCs. And would you characterize these activities thus far as just more regarding sustaining capital requirements? Or are you seeing any potential mix shift in terms of increasing productive capacity? And again, we did note some increases, I guess, on the exploration side in terms of your revenue base.

Yes, I think as I commented before, we have to distinguish first the gas and the oil market. And on gas market, I think the activity has been more sustained, and as seen in Qatar, a significant commitment to accelerate the North field redevelopment and expansion. So that has been very positive, and we have the benefit of that exposure. And the gas remained steady and supported elsewhere. On oil, you have a mix. But in short term, it's mostly a short cycle in anticipation of the supply constraints relief. And for two or three of the countries that participate in the GCC, they have already made public commitments that they will expand, and they will participate at scale into the post rebalance, if you like, of the supply and then participate in the capture of international share of supply into 2023. So that will mean plan that will materialize from planning, from contract and from execution into 2022.

Great, great. Olivier, you recently provided some longer-term outlook comments for new energy citing, call it, the 10% kind of growth CAGR as you helped your clients decarbonize. I was wondering if you could give us some thoughts on maybe the baseline for that long-term forecast and areas of your Transition Technologies portfolio that you're seeing perhaps the greatest traction as we sit here today.

Yes. I want to clarify that we have developed a New Energy portfolio aimed at participating significantly in the energy transition, moving beyond oil and gas. This includes areas like hydrogen, carbon capture and storage (CCS), geothermal energy, and lithium. Our Transition Technologies are crucial for the decarbonization of the oil and gas sector, assisting our customers in reducing their carbon and greenhouse gas emissions. We are concentrating on eliminating or reducing flaring by utilizing the Ora wireline technology, which helps avoid returning fluids to the surface to be flared. This unique technology enhances efficiency and minimizes the CO2 footprint for users. We're also focused on detecting and containing methane emissions. As mentioned in our recent press release, we are working with the CYNARA CO2 membrane, which excels in large acid gas treatment for CO2 sequestration and capture. These two aspects highlight the growing role of Transition Technologies. Most customers are approaching us to discuss methane detection, flaring, and other methods to significantly lower their CO2 footprint across their upstream operations. This will contribute to our technology growth and adoption in the coming quarters. In the long term, we will expand our New Energy portfolio, growing from hydrogen to CCS, geothermal energy, and lithium production, supported by our partnership with Panasonic. Thus, we have distinct short-term and long-term growth pathways.

Thanks for the fulsome answer. Appreciate it.

Thank you.

Good morning, and thanks for taking my questions.

Good morning.

Good morning, Tommy.

I wanted to start with your Digital & Integration margin. Your incremental margin this quarter was significantly higher than the trend and quite impressive. It's reasonable to expect that the total for 2021 will exceed the 30% range we discussed last quarter. Looking ahead, do you have any perspective on how to evaluate the incremental margin opportunity in a through-cycle or normalized context? Thank you.

So look, Tommy, yes, it is shaping up to be slightly above the 30%. At this level, we are happy anyway with 30% in Q2. There is a bit of seasonality actually on software and maintenance sales, which are lower in Q1. So it's kind of normal to see a nice uptick between Q1 and Q2. However, throughout the year on a full year basis, yes, we'll be a bit above 30%. Now, this is the kind of margins, which throughout the cycle, this is a fixed cost business. So as we accelerate the deployment of our digital solutions and the adoption improves, we could see margins increasing from there. So it's quite a healthy business, and this is why we are focusing on it basically.

Thank you. That's helpful. I wanted to ask a broader question about your New Energy strategy. Considering your position as the largest service platform globally among the oil and gas incumbents, what advantages do you think this gives you compared to smaller companies entering these markets, especially regarding scale and customer relationships? Also, on the flip side, how do you view the potentially lower cost of capital for those smaller players? This could lead to different strategies for capital allocation on your end. How do you decide when to invest in opportunities versus when to hold back if they seem too costly, preserving resources for future opportunities? Thank you.

A very good question. I think first and foremost, I think let me highlight the, I think, two different factors that will indeed leverage our current platform. First is the global deployment capability we have. We can industrialize and ship technology and deploy technology anywhere in the world, and we have done so for more than 80 or 90 years. And I think our ability to create a franchise in every country from technology developed centrally or we develop locally, I think, is something that is unique, and I think that differentiates us from many of the pure plays. The relationship we have and the customer base we have today will be occasionally, and I think will be the sense of the CCS where our customers have the opportunity to participate or in some of the downstream operation where they have a carbon capture or blue hydrogen opportunity could be an opportunity for us to continue to work with that customer base and expand. And at the same time, some of these companies are turning into integrated energy companies that will also participate at scale in the same market as we do. So that relationship will be useful, but I would more, I would say, highlight the global deployment capability. Now when it comes to capital allocation and capital deployment, I think it's very difficult to pinpoint too specifically here. I think we will continue to mature this venture, prepare for scale as we start to, I would say, progress on our milestones, progress on our partnership and progress on the business model and the supply chain model that are quite different from the one we experience today. And then in that context, we'll make the appropriate capital allocation decision to be accretive to our long-term growth and to our returns.

Thank you. I appreciate it and I turn it back.

Thank you.

Thank you. Olivier, you mentioned the return to 100 million barrels of consumption and sort of a share shift from North America to international where the oil is coming from. I'm curious if you think that the international activity needs to surpass 2019 levels to deliver that much oil and what you think the timeline is to get there.

In the short term, the rebalance will primarily depend on the release of spare capacity that likely exists. Currently, U.S. production is 1.5 million barrels below what it was in early 2020, and this gap has not yet been closed. I don't expect it to be closed as we move beyond 2022. There will be an increase in oil supply that can be sourced from the international market today. However, for sustainability in 2023 and 2024, the market will need to commit additional capacity. This is why we are seeing commitments in the Middle East and other countries, as well as the return of offshore projects and front-end engineering and design commitments. We have already seen 50 such commitments this year and expect that number to reach 100 by year-end, with most of these in offshore projects. This represents a 50% increase from last year, and we anticipate another 50% growth in the following period. Looking ahead, I expect that the demand pull on international supply will create enough activity to reach or exceed the levels witnessed in 2019 within the next two to three years.

Okay. Great. Very helpful. Separately, you mentioned APS a couple of times in the press release. It sounds like maybe activity has ramped a bit in Canada, where you have a bit more oil price exposure. I'm just curious how investors should think about the sensitivity to oil price from APS at this point. And then if you do have a successful transaction and sell the business, just how material of a shortfall in cash flow would that create just vis-à-vis what we're seeing right now?

The level of activity has remained consistent, primarily measured in terms of production. We experienced a favorable boost in WTI pricing during the second quarter from our operations in Canada; however, it is not significant in the overall picture. In Ecuador, at the current WTI price, our tariffs are generally fixed, or when they are variable, they have a maximum limit, which we have surpassed. Therefore, there is minimal sensitivity to oil prices at this level, except for Canada. This scenario presents a favorable opportunity to monetize our assets, as it has recently generated cash flow due to the oil price and the investments we have made there. Historically, this asset has required substantial capital expenditures. When we finalize the transaction, we do not expect a significant impact on our cash flow, and we anticipate receiving strong proceeds from the transaction.

Wonderful. Thank you very much.

Thank you.

Thank you very much. So to conclude the call, I would like to leave you with a few key takeaways. First, the second quarter results clearly demonstrate both the strength of our market position — particularly internationally, with sequential growth in all Divisions and Basins — and our significant operating leverage, resulting in more than 200 basis points of operating margin expansion internationally with all Divisions contributing significant fall-through. Second, the activity and customer trends observed during the quarter reinforce our conviction in an increasingly favorable outlook with a broad recovery across all basins and operating environments and with a much improved contribution from new technology adoption. Third, and absent further COVID setbacks impacting activity or economic rebounds, we are confident that the momentum for this upcycle — both North America and internationally, will continue during the second half of 2021 and will lead to another quarter of growth and margin expansion. As a consequence, we remain confident in our second half guidance shared previously for international growth and have increased our confidence in our full year margin expansion and cash flow generation. Finally, as we look further ahead, the conditions are set for an exceptional growth cycle in response to the call for supply in 2022 and future demand growth in subsequent years. This will increasingly favor international supply impacting land and offshore, short and long cycle globally. Ladies and gentlemen, our returns-focused strategy, international footprint, digital, decarbonization, and new energy strategic initiatives are highly differentiated, and we support our outperformance ambition throughout the cycle and beyond as we continue to write a new chapter for the company. Thank you very much.