Schlumberger Limited (NYSE:SLB) Q4 2022 Earnings Call Transcript January 20, 2023
Operator: Ladies and gentlemen, thank you for standing by. And welcome to the SLB Earnings Conference Call. At this time, all participant lines are in a listen-only mode. Later, there will be an opportunity for your questions. As a reminder, this conference is being recorded. I would now like to turn the conference over to the Vice President of Investor Relations, ND Maduemezia. Please go ahead.
ND Maduemezia: Thank you, Leah. Good morning. And welcome to the SLB fourth quarter and full year 2022 earnings conference call. Today’s call is being hosted from Houston, 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 fourth quarter press release, which is on our website. With that, I will turn the call over to you, Olivier.
Olivier Le Peuch: Thank you, ND. Ladies and gentlemen, thank you for joining us on the call today. In my prepared remarks, I will cover our fourth quarter results and follow this with a quick review of our full year 2022 achievements. Then I will share some thoughts on the outlook for the full year. Stephane will then provide more detail on our financial results and we will open for your questions. To begin, we sustained growth momentum through the fourth quarter, delivering strong revenue growth and further margin expansion, both sequentially and year-over-year. The quarter was characterized by very strong activity growth in the Middle East and offshore and was augmented by robust year-end sales in Digital. Growth was once again broad-based and our operational, commercial and earnings performance was outstanding.
We ended the fourth quarter with sequential revenue growth and margin expansion in North America and in all international areas. In the international markets, quarterly revenue topped $6 million for the first time in more than four years. Additionally, our international revenue growth rate has visibly outpaced the international rig count growth since the cycle trough in 2020. Service pricing, new technology and digital adoption all continued to trend positively. Looking broadly over the second half of the year, the pace of growth in North America significantly moderated. At the same time, international accelerated, growing in excess of 20% compared to the first half of the year, almost twice the growth rate of North America. We are clearly witnessing the start of a new phase of — in the growth cycle, which will increasingly be driven by resilient international growth.
This market dynamic led to a lower-than-usual cash flow performance at year-end. However, we further reduced net debt during the quarter and closed the year below our leverage target. Overall, these fourth quarter results helped us surpass our revised full year revenue guidance and we closed with EPS, pre-tax segment operating income and margins all at the highest levels in seven years. Switching to the full year, 2022 was pivotal for our industry and for SLB. It marked the second consecutive year of outperformance for the energy sector, providing further evidence of the multiyear upcycle and investment momentum that is underway. I would like to take a few minutes to reflect on what we achieved. We announced our new brand identity, with sustainability embedded in everything we do and opened a new chapter for the company.
This firmly positions SLB to benefit from the underlying macro trends that will shape the future of the energy, Oil & Gas Technology Innovation, Industrial Decarbonization, Digital Transformation and New Energy Systems. We executed consistently for our customers, achieving our best safety and operational integrated performance on record. We advanced our technology leadership and service quality differentiation, leading to more contract awards, higher technology adoption and increased pricing premiums. In our Core Divisions, we expanded pre-tax operating margins by more than 300 basis points. This was led by well construction, which expanded margins by more than 550 basis points. We also launched new products, services and solutions that increase efficiency and lower operational emissions.
You have seen many examples of these in today’s press release. Our Fit-for-Basin, Technology Access and Transition Technologies Portfolio have fueled growth and margin expansion in every division and every geographic area throughout the year. And we continue to strengthen our Core portfolio for growth and position for future resilience and returns with the acquisition of Gyrodata and the announced joint venture with Aker Solutions for subsea. In Digital, we had strong growth in Exploration Data, INNOVATION Factori and AI solution sales, and the adoption of our new tech digital platform is accelerating. We ended the year with more than 270 DELFI customers, more than 70% growth in DELFI users and our SaaS revenue more than doubled. These positive undercurrents combined with higher APS revenue, contributed to the Digital & Integration Divisions, expanding pre-tax operating margins by more than 170 basis points.
We continue to build adjacent expansion opportunities for our Digital business, both in operations data space and beyond oil and gas, such as carbon management. And in New Energy, we progressed technology development milestones, established new partnerships, particularly in CCS, and made new investments that have created a focused, yet comprehensive portfolio that offers promising growth opportunities for the future. Today, this portfolio comprises five business areas, Carbon Solutions, Hydrogen, Geothermal and Geoenergy, Critical Minerals and Stationary Energy Storage, and we are accelerating our R&D efforts to develop technology solutions that address hard to abate industrial and power generation emissions. As you see, our three engines of growth are on solid footing and are positioned for market success.
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In sustainability, we reduced our own carbon emissions intensity in Scopes 1 and 2, and we continue to be one of the highest ranked companies in our industry across the four rating agencies. We also made significant advances launching SLB End-to-End Emission Solution or SEES, an industry first to help our oil and gas customers address methane and other greenhouse gas emissions. Finally, for our shareholders, we demonstrated our commitment to superior returns. We increased our dividend by 40% in April 2022, followed by a further 43% increase announced today and resumed our share buyback program this month. These achievements highlight a remarkable year for SLB and speak to how we have successfully leveraged the breadth of our portfolio and our competitive strengths to deliver peer-leading outcomes for our customers and shareholders.
We are primed for significant success and look forward to carrying momentum into the year ahead. I would like to extend my thanks to the entire SLB team for delivering an outstanding year. Moving to the macro, we enter 2023 against the backdrop of market fundamentals that remain compelling for both oil and gas and low carbon energy resource. First, despite concerns for potential economic slowdown in certain regions, oil and gas demand growth remains resilient. The IEA forecasts that oil and gas demand will grow by 1.9 million barrels to reach approximately 102 million barrels per day. In parallel, markets will remain tightly supplied with modest production increases offset by the end of SPR release and well productivity declines in certain regions, most notably in North America.
Second, there is a greater sense of urgency around energy security. This is resulting in new investment in capacity expansion and diversity of supply. You will see this reflected in the number of new projects sanctioned, gas supply agreements signed and the return of offshore exploration, all at a pace unforeseen just 18 months ago. And third, the secular trends of digital and decarbonization are set to accelerate, driven by significant digital technology advancement in cloud and AI, favorable government policy support in New Energy investments and increased spending on low carbon initiatives by operator globally. Underpinning everything, commodity price remained at supportive levels for durable investment. In North America, spending growth is expected to be more restrained after an exceptionally strong year in 2022.
Capital spending growth is expected to increase in the high teens as rig counts potentially approach a plateau. Public companies, particularly the majors, are expected to increase short-cycle spending in key U.S. land basins and drilling activity remain strong to build up well inventory and support target production increase. In the U.S. Gulf of Mexico, where we have a significant presence, we expect the strong spending uplift to continue. Turning to international, markets are poised for strong growth in the Middle East and Latin America geographically, and more broadly, in offshore and in gas. In the Middle East, we expect record levels of upstream investments, with a ramp-up in various capacity expansion projects designed to deliver more gas production and a combined oil increment of 4 million barrels per day through 2030.
Offshore activity will continue to strengthen as tiebacks and new development projects mobilize and new FID’s are sanctioned, while Russian activity is expected to contract. Excluding Russia, customers’ capital spending internationally is expected to increase in the mid-teens. The combination of long-cycle oil capacity expansion projects, offshore deepwater resurgence and strong gas development activity will be a key driver for the multiyear duration of this cycle. This outlook is very favorable for SLB with multiple paths of resilient growth in Core, Digital and New Energy. On a full year basis, our ambition is to grow revenue in excess of 15% compared to 2022, supported by the step-up in international and offshore momentum, which will augment growth established in North America.
As a result, year-on-year adjusted EBITDA growth will be in the mid-20s driven by further margin expansion. More specifically, in the international markets, we foresee growth in the high-teens, excluding Russia, which is set to decline this year. We expect the highest growth rates to be realized in the Middle East and in offshore markets, particularly in Latin America and in Africa. In North America, we anticipate about 20% growth supported by offshore strength, land drilling activity and higher pricing. Full year margin expansion will be driven by further positive pricing dynamics, increased technology adoption and improvements from our enhanced operating leverage, mainly internationally. Let me share with you how we see this year unfolding.
Directionally, during the first quarter, we anticipate a typical pattern of activity begin — beginning with the combined effect of seasonality and the absence of year-end product and digital sales. Additionally, the first quarter will reflect some impact of year-on-year Russia activity decline. This will be followed by a rebound in the second quarter and further acceleration of growth trajectory in the second half of the year, particularly in the international markets. This typical pattern of activity and the favorable dynamics I described earlier combine to support the ambition we have set for full year growth and margin expansion. In addition, the beneficial impacts of an earlier than expected reopening in China, the easing of inflationary trends and any further restriction on Russian exports could lead to an acceleration of short-cycle activity globally and fast-tracking of FIDs internationally.
This could present further upside over the second half of the year. I will now turn the call over to Stephane.
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Stephane Biguet: Thank you, Olivier, and good morning, ladies and gentlemen. Fourth quarter earnings per share, excluding charges and credits was $0.71. This represents an increase of $0.08 compared to the third quarter and an increase of $0.30 or 73% when compared to the same period of last year. In addition, we recorded a net credit of $0.03, which brought our GAAP EPS to $0.74. You can find details of the components of this net credit in the FAQs at the end of our earnings press release. Overall, our fourth quarter revenue of $7.9 billion increased 5% sequentially and 27% year-on-year. All divisions posted sequential revenue growth led by Digital & Integration and Reservoir Performance. From a geographical perspective, North America revenue grew 6% sequentially, while international revenue grew 5%, led by the Middle East.
Fourth quarter pre-tax operating margins of 19.8% improved 104 basis points sequentially and 393 basis points year-on-year. Notably, over 70% of our GeoUnits posted their best margins since 2016. Adjusted EBITDA margin for the quarter of 24.4% was 219 basis points higher than the same quarter of last year, exceeding the guidance we provided at the beginning of the year. Let me now go through the fourth quarter results for each division. Fourth quarter Digital & Integration revenue of $1 billion increased 12% sequentially, with pre-tax operating margins expanding 386 basis points to 37.7%. This growth was driven by year-end exploration data licensing sales in the Gulf of Mexico and Africa. Increased APS project activity in Ecuador and higher digital sales internationally.
Reservoir Performance revenue increased 7% sequentially, while margins expanded 146 basis points, primarily due to new projects and activity gains internationally, led by the Middle East and the offshore basins. Well Construction revenue of $3.2 billion, increased 5% sequentially, due to strong activity from new projects and solid pricing improvements internationally, particularly in the Middle East and in Latin America. Margins of 21% declined 50 basis points, as improved profitability from the higher activity in the Middle East and Latin America was more than offset by the onset of seasonal effects in the Northern Hemisphere. Finally, Production Systems revenue of $2.2 billion was up 3% sequentially on higher international sales of artificial lift, completions and midstream production systems, partially offset by reduced sales of valves and subsea production systems.
Margins improved 32 basis points due to favorable technology and project mix. Now turning to our liquidity. Cash flow from operations during the quarter was $1.6 billion and free cash flow was $855 million. This performance did not reflect the increase we typically experience in the last quarter of the year as free cash flow was $200 million lower than in the previous quarter. This was due to a combination of the following four factors. First, we experienced extraordinary year-on-year fourth quarter revenue growth of 27%, representing incremental revenue of almost $1.7 billion. Second, our inventory balance increased 22% year-on-year to support our increasing product backlog driven by the sizable share of tender awards we have secured going into 2023.
Third, we pulled forward certain investments in CapEx in order to fully seize the continued revenue growth expected in 2023, particularly in our Well Construction and Reservoir Performance divisions. As a result, our capital investments increased $255 million sequentially. Our full year 2022 capital investments were therefore $2.3 billion, as compared to our initial guidance at the beginning of the year of $1.9 billion to $2 billion. Despite this increase, the CapEx portion of our capital investments was still at the midpoint of our 5% to 7% of revenue target. Lastly, lower-than-expected year-end accounts receivable collections contributed to reduced free cash flow. As you may recall, we had exceptional cash collections in the fourth quarter of 2021.
We did not achieve the same level of year-end collections as last year, and as a result, our DSO in Q4 2022 was approximately five days higher than at the same time last year. However, it is worth noting that our 2022 year-end DSO was the second best we have achieved going back at least two decades. Therefore, this is just a timing issue. Beyond free cash flow, our overall cash position was enhanced by the partial monetization of our investment in the Arabian Drilling Company, an onshore and offshore drilling rig company in Saudi Arabia. ADC completed an initial public offering during the fourth quarter and in connection with this IPO, we sold a portion of our interest in the secondary offering that resulted in us receiving net proceeds of $223 million.
We currently have a 34% interest in ADC. We also sold an additional portion of our shares in Liberty, which generated $218 million of net proceeds during the quarter. We currently have a 5% interest in Liberty. As a result of all of this, we ended the year with net debt of $9.3 billion. This represents an improvement of approximately $400 million sequentially and $1.7 billion compared to the end of 2021. This also represents our lowest net debt level since the first quarter of 2016. Consequently, our net debt-to-EBITDA leverage is now down to 1.4. In addition, our gross debt reduced by almost $2 billion during the year. We repaid in the fourth quarter $900 million of debt that matured and repurchased $800 million of notes that were going to come due in 2024 and 2025.
As a result of our strong operating results and the net debt reduction, our return on capital employed for 2022 was 13%, representing its highest level since 2014. Now looking ahead to 2023. We expect total capital investments consisting of CapEx and investments in APS and exploration data to be approximately $2.5 billion to $2.6 billion, as compared to $2.3 billion in 2022. Based on this, our capital investments will grow at a slower pace than our expected revenue growth in 2023. As a result and when taking into account our 2023 guidance for EBITDA to increase in the mid-20s when compared to 2022, we are confident that our free cash flow will increase significantly in 2023. Accordingly, we reaffirm our ambition to deliver a minimum average of 10% free cash flow margin through the 2021 to 2025 period.
This will allow us to continue increasing returns to shareholders as we leverage both the length and strength of the current growth cycle. Specifically, for 2023, we expect to distribute visibly more than 50% of our free cash flow to our shareholders between dividends and stock buybacks. Today, we declared the 44 — the 43% increase in our quarterly cash dividend to $0.25 per share, in line with our announcement at our recent Investor Day event. In addition, we have resumed our share repurchase program this month and are targeting a minimum amount of $200 million for the quarter. For 2023, we are targeting to return a total of $2 billion to our shareholders in the form of dividends and buybacks. I will now turn the conference call back to Olivier.
Olivier Le Peuch: Thank you, Stephane. Ladies and gentlemen, I think we are ready for opening the floor to the questions.
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Q&A Session
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Operator: Thank you. And our first question comes from the line of James West with Evercore ISI. Please go ahead.
Olivier Le Peuch: Good morning, James.
James West: Hey. Good morning, Olivier. Good morning, Stephane. So I guess the first thing I wanted to touch on, Olivier, is the international business had a really strong second half, particularly strong fourth quarter. But from everything I understand and see in the market is, we are really just getting started with ramping activity, particularly in the Middle East, particularly in some of the offshore markets, but we are in the early stages of that and so there should be a further acceleration in international activity. I know you gave some guidance for 2023 in terms of what you are anticipating in terms of revenue and EBITDA. But how would you characterize the next several quarters we will see, of course, the normal seasonality in 1Q, but as we get into kind of 2Q, 3Q of next year, we should see kind of big volume increases, and then of course, price increases on top of that?
Olivier Le Peuch: No. Indeed, I think, let me reframe a little bit of the guidance we shared.
James West: Sure.
Olivier Le Peuch: As we see today, the combination of offshore Middle East and broad gas investments internationally will continue to support a very solid growth internationally. We are seeing — as we have seen in the fourth quarter an uptick into the rate of growth for Middle East and that’s driven by a commitment to oil capacity increase and further gas development. And this, as I commented briefly in my prepared remarks will lead Middle East investment to be on record ever as we anticipated in this year or next year. And as a result, will generate significant pull for our revenue going forward. But I think what I will say is that, what is characterizing international as we see it, is that it has a lot of resilience, because it’s multi-pronged.
It moves multiple engines, short and long, oil and gas, offshore and onshore. And I believe that the — with our commitment for capacity expansion and gas development in Middle East is combining with offshore long-cycle, a return of deepwater, which is the operating environment that will see the most activity increase this year and also the return or the acceleration of exploration and appraisal offshore, which would be one of the defining characteristics of the quarters to come. So when you combine all of this, you are getting a very resilient multi-pronged and multiyear sustained growth pattern for the international market. And I think that’s what we see and it will indeed support not only growth this year, but it will support year growth next year and the years to come and it will be multi-pronged and fairly broad and with multiple geographic impact.
James West: Right. That’s exactly what we are seeing. So excellent there. And then maybe if I could hone in just as a follow-up on the offshore markets, because that’s an area where Schlumberger has or sorry, SLB has an increased market share, it’s also a high technology area of the business. Could you maybe talk through some of the things that are happening in offshore, shallow water plus really the deepwater area and especially what you are seeing in exploration and appraisal, because that’s, as you said, the defining characteristic here and we haven’t seen exploration in, well, a long time, so I’d love to get your thoughts there?