Schlumberger Limited (NYSE:SLB) Q3 2023 Earnings Call Transcript

Schlumberger Limited (NYSE:SLB) Q3 2023 Earnings Call Transcript October 20, 2023

Schlumberger Limited beats earnings expectations. Reported EPS is $0.78, expectations were $0.77.

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the SLB Earnings Conference Call. At this time, all participant lines are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to the Senior Vice President of Investor Relations and Industry Affairs, James McDonald. Please go ahead.

James McDonald: 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.

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Olivier Le Peuch: 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 89 — 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 decarbonizes 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.

Stephane Biguet: 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 $151million. 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.

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

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Q&A Session

Operator: Certainly. [Operator Instructions] And our first question is from the line of James West with Evercore. Please go ahead.

James West: Hey, good morning, Olivier and Stephane.

Stephane Biguet: Good morning, James.

Olivier Le Peuch: Good morning.

James West: So, Olivier, I know you recently returned from [technical difficulty] and most likely met with all of the major oil producers in the region. Can you [technical difficulty] 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.

Olivier Le Peuch: No, thank you, James. I hope everybody could catch your question right into Middle East. Indeed, I have the privilege to be there for about a weekend and not only went to the conference and met a lot of customers in the region, but also had the benefit to go to operation in Saudi and visit the customer in south over there. So great insights. Needless to say that this is clearly the largest investment cycle, its clean on the way. The momentum is set. It’s not about the concept and I think the sentiment across [indiscernible] shall be positive. Leah, there’s a noise on the …

Operator: Yes, Mr. West, if you could mute your phone sir. Okay, you may proceed.

Olivier Le Peuch: Thank you. So if I were to characterize attributes, I think breadth, resilience, durability that we have characterized for the full cycle, I think are very much in full display in Middle East. I think the Durability 27 is the target for capital expansion. Breadth is not only old, but it’s also gas as a driver for general vision or gas consumption and energy exports. Its offshore and onshore, its conventional and unconventional, and goes beyond one or two country that are very well known into Kuwait, into Iraq, into Egypt and more. And it’s clearly decoupled from some of the short-term uncertainty. So it’s all made about of long-term contract from the re-contracting to the service contract. And we are clear beneficiary of this situation.

We have a unique footprint in the region. And indeed, we see that this will continue to support growth in the years to come for SLB. And this year, as stated before, we will record a record revenue in the region. And we will continue to grow and use this to be accretive to international growth and accretive to our international margin and the company. A great outlook in essence.

James West: That’s great. Thanks, Olivier for that. Sorry about my phone issues here. Probably a follow-up for me, maybe for Stephane is on FX. How much was FX a headwind during the quarter?

Stephane Biguet: So, thanks, James. So, look, most of our revenue is built in U.S dollars. But indeed in a few countries, it’s partially not the case for. So for some of us, we indeed had an unfavorable impact of the U.S dollar strengthening against local currencies. And that was both sequentially and year-on-year. I prefer I’m not giving you a specific amount as we have contractual adjustment clauses that come and offset the negative effect at least partially, but yes the revenue would have been slightly higher without that. And the last point here to remember is a lot of our cost as well are expressed in local currency. So we have a natural hedge on this. And the net impact on the earnings is quite marginally, it’s limited.

Operator: We will move on to David Anderson with Barclays. Please go ahead.

David Anderson: Thank you. Good morning. Morning, Olivier. With Aker now part of the — with Aker now part of the OneSubsea JV, I was hoping you could talk a little bit more about the value proposition of not only a larger subsidy entity, but how it fits kind of within the whole — how now fits in a fully consolidated market. In terms of offshore worth in FIDs, obviously, the trending really couldn’t be any better, but what is the larger, more robust OneSubsea going to Schlumberger as a whole? And then as a follow-up, if you could talk about some of the integration steps you’re planning, culture is such a big part of Schlumberger. Just wondering how you’re thinking about bringing in one of your long standing competitors into the fold and — how do you think about culture in that sense? Thank you.

Olivier Le Peuch: Great question, Dave. And I think indeed, we have been working on this. I’m very, very proud and I believe that the timing couldn’t be better that closing this now as the onset of the offshore growth and the long duration that we see with SLB beyond 2025. So, if I had to take three key words, I would say technology fit, integration capability and scale are the three elements that I think resonate very well and create value for customers. Technology, whether we are enhancing and getting with this addition of a comprehensive portfolio that is fit to every deeper market that exists and that includes further capability, complimentary and capability in Subsea processing and also in own vehicles [ph] that complete the portfolio and allow us to fully participate and being differentiated in every basin, in every deepwater condition in the world.

Integration, we bring and we keep our unique subsurface reservoir to processing capability that we had already in OneSubsea. But we are enhancing it with a larger and a very competent team running us for from a acquisition and engineering capability. So that we can take any deeper prospect and help customers and collaborate to get the best outcome and we are getting our Subsea7 partner to joining and to be aligned with making this a success, when and as we are required to deliver as integrated with us. So all in all, this is what the value brings in integration. Scale. Scale give us manufacturing footprint that give us flexibility, and the ability to respond fast and to respond to customer need everywhere and give us the unique life of field with the largest install base of subsidiary, where we will use digital ,we will use integration capability with our performance to provide further integration and further life of field and looking pollution recovery, if you like, long-term.

So customer feedback is excellent at the onset. I think the customer really appreciate and recognize the recovery potential, the comprehensive technology portfolio, the lower emission, the digital and the integration capability. Culture. I think we have discovered throughout this engagement, that actually the culture are very much aligned. And I think we have had a day one set of events last week or 2 weeks ago that we’re really our planning are aligned we are and our complementary culture and portfolio are to go into this. So I’m very optimistic, very positive and customer feedback is extremely positive to onboard this. And you may have seen the [indiscernible] in my opinion, which is a precursor, in our opinion, is what we can do to partner with our customers and to help unlock the future of subsea reserves and to impact their recovery, their efficiency and economics and their lower carbon outlook.