SLB (SLB) — Q3 2023 Earnings Call Transcript

Thank you, Leah. Good morning, and welcome to the SLB third quarter 2023 earnings conference call. Today's call is being hosted from New York City, following our 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 third quarter press release, which is on our website. With that, I will turn the call over to Olivier.

Thank you, James. Ladies and gentlemen, thank you for joining us on the call today. In my remarks this morning, I will begin by reviewing the third quarter financial results we represented in today’s earnings release. Then I will discuss the progress we are achieving across our three engines of growth and the macro environment supporting that. And finally, I will share our outlook for the fourth quarter and the full year. Stephane will then provide more details on our financial results, and we will open the line to your questions. Our third quarter results are built upon the positive momentum we established in the first half of the year and firmly position us to achieve our full year financial ambitions. We continued to grow revenue and adjusted EBITDA both sequentially and year-on-year, and we generated free cash flow of $1 billion for the second consecutive quarter. Internationally, we continued to seize the cycle. We achieved our highest international revenue quarter since 2015 by growing revenue in this market for the ninth consecutive quarter year-on-year. This was particularly visible in the Middle East & Asia, where we posted 22% year-on-year revenue growth, led by significant growth in Saudi Arabia, the United Arab Emirates, Kuwait, and Egypt. Our strong international activity was further augmented by resilient investment in the offshore markets, notably in Africa, Brazil, and Scandinavia. Offshore continues to offer many opportunities for our business, and I will shortly discuss how the recent closing of our OneSubsea Joint Venture with Aker Solutions and Subsea7 will help us to expand our footprint in the market moving forward. And in North America, although revenue decreased sequentially due to lower activity, we continued to grow year-on-year, outperforming the rig count. Once again, our focus on the quality of our revenue combined with the differentiated value we deliver through technology drove margin expansion. Our EBITDA margin reached a new cycle high of 25%, and our pre-tax segment operating margin expanded for the 11th consecutive quarter year-on-year. These are very positive results, and I want to thank the entire SLB team for delivering this strong performance. Next, I would like to share some updates about our progress across our three engines of growth: Core, Digital, and New Energy. Let me begin with the Core. The oil and gas sector continues to benefit from a broad, durable, and resilient multiyear growth cycle that is being supported by long-cycle developments, production capacity expansions, exploration and appraisal, and the recognition of gas as a critical fuel source for the energy transition. These market fundamentals remain very compelling for our Core business, which has grown 22% year-to-date and has materially expanded margins. This strong performance is being driven by the diversity of our portfolio, our industry leading technology, and our unique integration capabilities. Reservoir Performance achieved exceptional results with stronger evaluation activity; Production Systems achieved its highest level of margins in the cycle led by Subsea, Surface, and Artificial Lift; and Well Construction maintained impressive results through new technology innovations and differentiated performance. All in all, this was a very strong quarter across our Core divisions. The supportive macro environment is also leading operators to make long cycle investments offshore, where advances in efficiency have significantly improved project economics. We have visibility into FIDs extending well beyond 2025, and there couldn't be a better time to join forces with Aker Solutions and Subsea7 to drive a new era for subsea. Today, SLB is recognized for its unique ability to handle large, complex, and fully integrated offshore projects from subsurface development to midstream processing. Through our OneSubsea joint venture, we will further enhance this offering by bringing new levels of technology and partnership to the market. Together, our companies are the clear leader in subsea multiphase boosting and subsea gas compression, and we will provide electrification and digital solutions to further enhance the business. This partnership approach will also create a more flexible customer offering through scale, increased capacity, and life of field services. Collectively, this will drive meaningful change to subsea asset performance as we partner with customers to help them unlock their reserves, drive efficiency, reduce cycle times, and reduce emissions in the deepwater market. Now, let me turn to Digital. On our call last quarter, I shared an update on the emerging digital trends shaping the industry. These included the adoption of cloud computing, the power of data and AI at scale, and digital operations gaining maturity. At a recent investor conference, I discussed how SLB is capitalizing on this opportunity with our platform strategy comprising of a workflow platform that serves as the backbone for our customers' planning and operations and our data and AI platform that unlocks data at scale for digital transformation. Today, we are seeing increased digital adoption across the industry. Delfi continued its year-over-year growth momentum with a 49% increase in users and an 86% increase in compute hours compared to the third quarter last year. Additionally, our customers are embracing our connected and autonomous drilling solutions, with 1.9 million feet of automated drilling completed in the third quarter, an increase of 60% year-over-year. As a result, SLB’s platforms representing our new digital technology offering, sustained growth at a CAGR rate of about 60%. The benefit of these technologies is clear, and you can see this illustrated in our earnings press release this morning, with our Shell/AWS collaborative agreement and the Kuwait Energy Basra Limited digital oilfield contract serving as just two recent examples of customers choosing SLB Digital technology to reimagine their workflows across the E&P value chain. And finally, let me quickly discuss some of the exciting opportunities in our New Energy business and Transition Technologies portfolio. As we address the energy trilemma, our industry has an imperative to decarbonize operations. Two of the most immediate opportunities to do this are reducing methane emissions and scaling CCUS as a solution for mitigating climate change. Regarding methane, we have opportunities to address fugitive methane and flaring through better monitoring and leak detection. A few weeks ago, we launched a new IoT-enabled methane point instrument for continuous monitoring that seamlessly connects to our methane digital platform for insights and analysis, eliminating the need for intermittent site visits and enabling operators to quickly scale up across their operations. This and other solutions are available today to help clients abate their methane emissions. And in CCUS, momentum is building across the industry, both in oil and gas as well as in other hard-to-abate sectors. SLB is actively involved in more than 20 CCUS projects globally, and we are investing in capture technology, as underscored by the partnership with TDA Research, highlighted in our earnings release. Overall, we are pleased with our pipeline of technology and projects, and we have confidence that by establishing ourselves as a leader in this space, we will create yet another avenue for diversified long-term growth. Now, I will turn to our outlook for the fourth quarter and the full year. In the fourth quarter, we expect continued sequential revenue growth driven by year-end Digital sales and seasonal product and equipment sales in Production Systems. The quarter will also reflect the results of the OneSubsea joint venture. As a result, we expect overall sequential revenue growth to be in the high-single digits. With our continued focus on the quality of revenue, harnessing operating leverage, and further technology adoption, we expect to maintain global pre-tax segment operating and EBITDA margins at their highest levels in the cycle, in line with our third quarter performance. Stephane will provide additional color on the net contribution of the OneSubsea joint venture on our fourth quarter guidance. Turning to the full year, we expect to achieve the financial ambitions we shared back in January. Excluding the effects of the OneSubsea joint venture, we expect to conclude the year by increasing revenue more than 15% and growing EBITDA in the mid-20s, with recent North American headwinds being more than offset by strong international growth. With these strong full-year results, we will remain well positioned to continue returning value to our shareholders. I will now turn the call over to Stephane.

Thank you, Olivier, and good morning, ladies and gentlemen. Third quarter earnings per share was $0.78. This represents an increase of $0.06 sequentially and $0.15 when compared to the third quarter of last year. We did not record any charges or credits during any of those periods. Overall, our third quarter revenue of $8.3 billion increased 3% sequentially. International sequential revenue growth of 5% was led by the Middle East and Asia, which increased 8%, while North America revenue decreased 6%. Sequentially, pre-tax segment operating margin increased 73 basis points, which resulted in incremental margins of 48% largely due to the high-quality international revenue. Company-wide adjusted EBITDA margin for the third quarter reached 25%, the highest level since 2015. On a year-on-year basis, third quarter revenue increased 11% as international revenue grew 12%, while North America revenue increased 6%. The strong international performance was led by broad-based growth across the Middle East and Asia and offshore markets. Let me now go through the third quarter results for each division. Third quarter Digital & Integration revenue of $982 million increased 4% sequentially, with margins decreasing 2 percentage points to 32%. The sequential revenue growth was primarily driven by increased APS revenue and increased digital revenue, including higher sales of exploration data licenses. Margins declined sequentially as lower profitability in APS more than offset improved digital margins. Reservoir Performance revenue of $51.7 billion increased 2% sequentially while margins improved 190 basis points to 20.5%. These increases were due to strong international growth, a favorable technology mix, and improved pricing. Well Construction revenue of $3.4 billion increased 2% sequentially, led by strong growth in the Middle East and Asia, which was partially offset by lower revenue in North America. Margins of 22.1% increased 38 basis points driven by the international markets. Finally, Production Systems revenue of $2.4 billion increased 2% sequentially, as international revenue increased 7%, led by the Middle East and Asia and Latin America. North America revenue decreased by 8% due to lower subsea activity. Margins expanded 147 basis points to 13.5%, representing the highest margin since we began reporting results for the division. This expansion was primarily driven by higher sales of completions, artificial lift, and surface production systems, as well as pricing improvements. Now turning to our liquidity. During the quarter, we generated $1.7 billion of cash flow from operations and free cash flow of just over $1 billion. As a result of this strong cash flow performance, our net debt reduced sequentially by $731 million to $9.4 billion. Our net debt to trailing 12-month EBITDA leverage ratio of 1.2 is at its lowest level since 2015. Capital investments, inclusive of CapEx and investments in APS projects and exploration data, were $640 million in the third quarter. For the full year, we are still expecting capital investments to be approximately $2.5 million to $2.6 billion. We repurchased 2.6 million shares of our stock during the quarter for a total purchase price of $151 million. We continue to target to return $2 billion to our shareholders this year between dividends and stock buybacks. Before closing, I would like to add some color to the Q4 outlook that Olivier just provided. We are expecting sequential fourth quarter revenue growth to be in the high-single digits, with pre-tax margins remaining at the same high level we achieved in the third quarter. As Olivier highlighted, this outlook includes the contribution from the recently acquired Aker subsea business, which will be consolidated under our Production Systems division starting in the fourth quarter. The Aker subsea business is expected to contribute approximately $400 million to $500 million of incremental revenue in the fourth quarter, with pre-tax operating margins in the low teens. Therefore, excluding the effects of the acquired Aker subsea business, SLB's fourth quarter sequential revenue growth is expected to be similar to the sequential revenue growth we experienced in the third quarter. SLB's organic pre-tax operating margin, again excluding the effects of the acquired Aker business, is expected to continue expanding sequentially. After considering the impact of below the line items relating to this joint venture, such as amortization of intangibles, taxes, and non-controlling interest, this transaction is expected to be slightly accretive to our fourth quarter earnings per share, excluding charges and credits. In closing, we are very excited about the prospects of this venture, which strengthens our offshore portfolio and has the potential to deliver more than $100 million of net annual synergies starting year three after closing. I will now turn the conference call back to Olivier.

Thank you, Stephane. Ladies and gentlemen, we will now open the line for your questions. Leah, if you may open the lines.

Hey, good morning, Olivier and Stephane.

Good morning, James.

Good morning.

So, Olivier, I know you recently returned from a trip and most likely met with all of the major oil producers in the region. Can you share your thoughts on the Middle East and how we should think about the Middle East with respect to Schlumberger over the next several years because it looks like it's going to be a huge driver of growth.

Thank you, James. I hope everybody could catch your question about the Middle East. Indeed, I was there recently, met a lot of customers in the region, and gained great insights. It is clear that this is the largest investment cycle fully underway. The momentum is set. It's not just about concepts; sentiments across the region are very positive. If I were to characterize it, the breadth, resilience, and durability throughout the full cycle are all on display in the Middle East. Durable capital expansion targets are being set, and the recognition of gas as a driver for energy consumption and exports adds to this. It's clear that there is a long-term contract structure supporting this growth, and we see this benefiting SLB significantly. This year, we are set to record record revenue in the region. We expect to continue growing and see it accretive to our international growth and margins.

That's great. Thanks, Olivier, for that. Sorry about my phone issues here. I have a follow-up for Stephane regarding FX. How much was FX a headwind during the quarter?

Thanks, James. Most of our revenue is billed in U.S. dollars. In a few countries, it is not fully the case. So indeed, we had an unfavorable impact from the U.S. dollar strengthening against local currencies. I prefer not to give a specific amount as we have contractual adjustment clauses that come and partially offset this negative effect. However, yes, revenue would have been slightly higher without that. The last point is that a lot of our costs are also in local currency, which provides a natural hedge. So the net impact on earnings is limited.

Thank you. Good morning. Olivier, with Aker now part of the OneSubsea Joint Venture, I was hoping you could talk a little more about its value proposition as a larger subsea entity. How does it fit within the consolidated market and in terms of offshore worth in FIDs? What does the larger, more robust OneSubsea mean for Schlumberger overall? Additionally, could you share some thoughts on the integration steps you're planning and how you view culture as a big part of Schlumberger? How do you think about bringing in one of your long-standing competitors into the fold?

Great question, David. I am very proud that closing this now coincides perfectly with the onset of offshore growth we anticipate beyond 2025. If I had to capture it in three key terms, I would say technology fit, integration capability, and scale are the elements that create value for customers. Technology includes the enhancement and comprehensive portfolio for deeper markets, while integration helps us leverage our unique subsurface reservoir to processing capability. Scale provides us with manufacturing flexibility and the ability to respond quickly to customer needs, ensuring we maximally leverage our install base for long-term performance and service delivery. Customer feedback so far has been excellent, with clients recognizing our potential for better environmental impacts and greater integration capabilities. In terms of culture, I believe we discovered throughout this engagement that our cultures are fairly aligned, and we have had brainstorming sessions to align our planning as we move forward together.

Thank you, Olivier. Shifting to your digital business, there have been fluctuations in APS this year. Can you provide insight into what you've seen regarding pricing in Reservoir Performance, and is it reasonable to expect similar margin expansion in the fourth quarter without the OneSubsea JV?

Thank you, David. We continue to be positive about our digital business and its adoption among customers. I'm pleased to say that we have filed numerous announcements regarding the advancements in digital operations, which are going really well. We anticipate strong visibility of digital revenue in the fourth quarter, driven by the year-end sales effect. Overall, we are optimistic about achieving the financial targets we've set.

Yes, we expect to see continuous margin expansion in the fourth quarter, particularly in digital and integration margins driven by accretive year-end sales. There will also be incremental improvements in other divisions, particularly Production Systems, as these typically show strong end-of-year performance.

You can expect this margin expansion to continue into 2024 as the differentiation aspects and the favorable operating environment are likely to persist.

Yes, good morning. Regarding your Production Systems outlook for margins post the Aker JV, can you share how we should think about margin growth within this business amid current legacy contracts, better pricing contracts rolling in, and the expected synergies?

We believe that we will continue our journey of margin expansion. We have reached the highest margin in Production Systems since we have been reporting this division, and we expect contracts rolling in to be more accretive. We will also benefit from improved pricing conditions and enhanced efficiencies through the use of technology that our team has delivered. We expect that our Subsea performance will continue to generate high teens margin levels, and the addition of the Aker subsea will increase our revenue generation for the future, creating $100 million in synergies by year three. Overall, we are positioned for continued growth and margin enhancement.

Regarding North America, you've shifted to a more product-focused sales model, but we're seeing consolidation among your customers. How does that impact your strategy?

We are satisfied with our strategy and deployment in North America. While market consolidation continues, we believe our technology offerings resonate well with larger integrated companies. We will continue to showcase our technology and digital capabilities, remaining agile to respond to market changes while maintaining exposure to the top end of our customer base. Additionally, our CCS initiatives play a critical role in our growth strategy in NAM.

Good morning. Could you elaborate on margin performance in the Core and specifically on the pricing gains in Reservoir Performance? Should we anticipate similar margin growth in Q4 without considering the OneSubsea JV?

The Core is benefiting from differentiated performance, technology acceleration, and enhanced integration capabilities. This performance, recognized by our customers, is allowing us to command a pricing premium. I will let Stephane provide specific margin comments for Q4.

Excluding the Aker effect, we expect to continue expanding margins in Q4 across divisions, particularly in digital and integration. The anticipated high level of seasonal sales will be a contributing factor.

Shifting to North America, what are you seeing real-time in this market? Do you think we are nearing a bottom as we approach 2024?

Yes, we believe we have moved past the trough. Incremental recovery is likely, especially in U.S. land activity. The North America offshore market remains steady and will continue to benefit from our collaboration with OneSubsea.

Good morning, everyone. Given the recent agreements to lift sanctions on Venezuelan oil exports, what do you think the opportunity could be for SLB in that market?

It's too early to provide specifics about the size of the opportunity. However, we have maintained a presence in Venezuela historically, and we are prepared to mobilize quickly once we get support from our partners. Any guidance on revenue impact will come later.

Thank you. I would like to ask about margin potential. What factors could lift margins from their current position as we move into 2024, and are there constraints that could limit reaching maximum levels?

Our execution strategy will define our ability to capture and enhance margins moving forward. We have initiated a margin expansion journey, and we expect favorable market conditions to support continued improvement. Application of technology and integration capabilities will further our efforts. Ladies and gentlemen, as we conclude today's call, I would like to leave you with the following takeaways. First, the ongoing oil and gas cycle continues to display the unique attributes of breadth, resilience, and durability that closely align with our business strategy. In this environment, our unparalleled offerings in our core, our ability to enhance value through digital, and our investments in New Energy have us positioned for success. Second, our international reach continues to drive our financial performance. As investment momentum has shifted internationally and offshore, our business is well positioned for sustained growth and will be further supported by our OneSubsea joint venture. Third, after posting an impressive 9-month year-to-date performance and with visibility into the fourth quarter and 2024, we remain confident in our full-year and through-cycle financial targets. This is an exciting time for the energy industry, and SLB is ideally positioned for success across all time horizons. This is an excellent environment to continue delivering value to our shareholders. I remain fully confident in our strategy and look forward to another successful quarter and the close of the year. With that, we will conclude our call this morning. Thank you, and good day, everyone.