SLB N.V. (SLB) Earnings Call Transcript & Summary

So ladies and gentlemen, good morning. I'm very pleased to be here with you today. So I would like to thank Arun and JPMorgan for the opportunity to speak with you once again. Today, I would like to share with you our latest perspective on the growth cycle that is upon us and describe a few of its characteristics, and more importantly, how this saga is firmly aligned with Schlumberger's established strengths; our expanded capabilities and leadership; and most critically, our returns-focused strategy. Before I start, let me remind you that some of the statements we'll be making today are forward-looking and subject to risks and uncertainties that could cause our results to materially differ from those projected in these statements. Therefore, I refer you to our latest 10-K and SEC filing. So let's begin with the growth cycle. First, the market fundamentals are very constructive for our industry as it emerged from a period of underinvestment with spare capacity and global inventories at decade lows while oil and gas price remain elevated. Energy security, inflation and a potential of a slowdown in the pace of economic growth has emerged as a set of new opportunities and risk in this landscape. Despite the uncertainty, the need for reliable energy supply and reinvestment in our industry remain very compelling and ultimately extends the growth cycle both in terms of duration and magnitude. Second, E&P capital investment is poised to accelerate broadly across all geographies and operating environments to drive new production and capacity increase, not only to address short-term supply dislocation, but also to meet projected demand growth on the horizon. Significant activity growth is occurring in short- and long-cycle project in North America and internationally, both onshore -- and onshore and offshore, which results in a very favorable mix for Schlumberger. Third, the secular trends of digital and decarbonization are gaining momentum as additional attributes of this growth cycle. This industry is embracing decarbonization as a critical element that will ensure long-term resilience for our industry and deliver the mandate of lower emission for a sustainable future. In parallel, digital is also embracing -- is also being embraced as an enabler of higher performance, value creation and as part of the industry path to decarbonize operations. Finally, this is a cycle that will see improved pricing in the service sector as we enter a new era of performance and capital discipline across operators and service providers. These factor results in a growth cycle particularly aligned to our strengths; a cycle that is global in scope; impacts all phases of oil and gas development, from exploration to production; includes all operating environments, from high-volume onshore to deepwater offshore; and has digital, decarbonization and pricing as defining attributes. Let me illustrate this alignment of market condition and our differentiated value proposition using the power of our core portfolio, 1 of our 3 engines of growth. With growth materializing across all geographical basins and investment flowing into every phase of exploration to production, Schlumberger is distinct in its breadth and depth of market participation. Compared to the previous cycle, we have broaden the scope of our core to the subsea -- to the addition of subsea and surface production system, processing solution and drilling equipment. This addition have expanded our addressable market and advanced our market positioning in several segments. Additionally, disruptive fit-for-basin technologies, combined with the industry's most comprehensive technology portfolio and digital capabilities, provide Schlumberger with an unmatched ability to integrate across the entire value chain, from subsurface to midstream facilities. This elevates our ability to capture growth, create more value for our customers and generate new revenue streams. The third element of our differentiation is in our core -- is the foundation of enhanced operating leverage that we have established, a foundation that will further benefit from pricing tailwinds that have already begun. These tailwinds are not just a function of service capacity discipline and inflation, but also increasing adoption of new technology and customer recognition of superior performance. Altogether, our core is performing exceptionally well very early in the cycle, as already demonstrated by our significant margin expansion and cash generation thus far. And we are set to extend this outperformance as the cycle continues to expand in North America and accelerate across international basin and the offshore environment. In fact, the return of offshore represents an exceptional opportunity for our core. Let me show you what this looks like. The growth cycle is developing across the entire offshore market, and we are better positioned for this than we have ever been because of our breadth, technology, integration ability and the addition of digital, which will maximize upside performance. Current industry FID estimates project a nearly 50% increase in offshore investment over the next 4 years when compared with the period from 2016 through 2019. This is already manifesting in several FID year-to-date and a considerable increase in the pipeline of pre-FID across offshore basins. Our presence in offshore markets is very significant, with a leading footprint across global offshore rigs and is the most far-reaching geographically, estimated at twice the size of our nearest competitor, from the Gulf of Mexico, the Arabian Gulf, Caspian, Brazil and Mozambique. Everywhere there is an offshore operation, Schlumberger is there. To emphasize the resounding implications of the return of offshore for Schlumberger. Offshore operations currently represent an average of 5x the revenue potential of onshore, from the combination of higher market penetration, broader service and product offering and higher technology intensity. Offshore operators today are looking for every opportunity to accelerate discovery and development cycle time and increased productivity. This performance focus results in a premium for our technology, digital operation and integration capability that reduce cycle time, lower breakeven price and enhance project returns. Altogether, the return of offshore will be a very potent driver for further growth and margin expansion in our core. To summarize, this is possibly the strongest position from which we have entered a growth cycle. Moreover, this is a unique cycle that increasingly favor our strength as the leading global technology provider with exceptional performance attributes. The foundation of operating leverage we previously established is contributing to our margin expansion. And now the power of our core, which has a combination of unmatched breadth, scope, differentiated technology and integration, is set to drive distinctive earnings growth and cash flow generation as pricing momentum develops. All of this is amplified by digital, an aspect where industry is advancing at an accelerated pace, and where our digital leadership enables superior margin generation. These very favorable conditions are unfolding as we speak. Our second quarter is shaping up solidly, further strengthening our confidence in our ambition for 2022 and beyond. Directionally, all the growth and activity attributes are in our favor, positioning us to seize this cycle like never before. Ladies and gentlemen, this is an exciting time for Schlumberger. Thank you very much.

Let me go ahead and start the Q&A. As you can see from the oil markets and just the broader stock market tape, there's been a lot of volatility within just macro markets. And so I was wondering if you could give some insights on how you see the oil and gas macro picture playing out. We've clearly seen some tightness with OPEC discipline, Russian sanctions. But how do you balance that versus some of the demand headwinds we're seeing from potential demand disruption and slowing economic conditions?

I think the market is a supply-led market. The spare capacity is at 2% or less. We don't expect this to change in the coming months. So the supply tightness, the energy security as a new global priority, the need for diversification of supply, all are pointing to incentivizing the operators to further invest and respond to this demand in the short term. So there are some risks and uncertainty that relates to the demand growth in the short term, to the resumption of activity to pre-pandemic level. But I believe that if you look at all the indicators, travel indicators, activity, short-cycle activity into the demand, we foresee that this would be more than offset by this supply tightness. So this will remain the characteristic of the cycle in the short term.

Great. Let's talk about upstream spending growth this year and next year. What are you seeing in North America and international markets? And I also want to ask you about, when do you expect the offshore cycle to really start? It seems like you're seeing that today, but now it seems to be a theme of this morning's presentation.

Yes. I think we have been guiding. As we started the year, we guided the market with what we thought were teens -- low-teens market upside internationally and 20% to 30% in the North American market. I think you have seen the result to date. Certainly, the North American market is slightly ahead of this. And the international market is shaping as according to our guidance. Out of which, if you look in detail, we have seen that the projection of offshore, now you point offshore, indicates that offshore internationally will grow faster than land activity this year. Directionally, if we look forward, I think that the pace of growth of international market will accelerate with the seasonal effect in the second half in addition to the rebound from the second quarter and will accelerate further going forward, based on the combination of short-cycle activity that has been unleashed and is on pace and long-cycle activity resuming with some offshore activity that both -- that is both short and long cycle. So internationally, we see an acceleration of the pace of growth and activity going forward. Directionally, North America has benefited from a very strong early cycle growth. And we see this as being more moderated going forward, be it a seasonal effect with budget exhaustion or be it in a macro sense with higher growth going forward for -- on the international side.

What about -- you mentioned that North America maybe moderating a little bit. What are you seeing -- what type of behavior are you seeing from the IOCs internationally, and the NOCs? We do know that OPEC had been slowly getting their barrels back on the market. Are you seeing any step-change in kind of activity?

Yes. If you look at -- I think it's not only IOCs and NOCs. You have a lot of large independent operating internationally that have already seized the cycle, that are reinvesting. The NOCs have been responding. And have been disciplined, those of -- those companies that were part of the OPEC+ agreement, but they are reinvesting now in short cycle. And some of them in the Middle East have made a commitment for capacity expansion. So you will see a further long cycle capacity expansion projects that will be initiated later this year and next year, be it in Saudi Arabia, be it in UAE, be it in Iraq and other place in the Gulf. And by contrast, the IOCs have been focusing on their best assets. They have been accelerating [ in filtering ] to get the most of the existing infrastructure. They have been reexploring where they could expand around their hub -- their preferred hub at advantaged condition. And you have seen exploration internationally is back. Discreetly, but it's back. I think Namibia is the best example of a discrete investment under the radar screen and is becoming a hot basin, with 2 or 3 customers investing and appraising their early discovery. And I think what we have seen in Surinam and Guyana the past is shaping up to be the next hot basin. So things happening internationally by IOCs, by NOCs and is shaping up directionally very well.

Great. Could you talk about Schlumberger's success on large tenders? You've announced a lot. And maybe you can give the audience some...

No, I think we don't comment. For competitive reason, we don't comment on specifics. But I think we have been commenting on large tender that we're being awarded in the recent past through the earnings press release in the first quarter and in the last quarter last year. And I think we have seen some of this award being awarded at incremental price. So the market is turning. And the pricing that has been impacting favorably very visibly the North America market in -- for the last 18 months, I think, is definitely an attribute of this cycle internationally. And we are seeing a discrete pricing adjustments to offset inflation and to recognize performance. And we are seeing that, with the conditional right, we are seeing 10 award at increased pricing as well as the supply capacity is tightening, as the -- there's a flight to quality, there is a flight to performance by the IOC, the NOC and the independent. And there is somehow a renewed sense of urgency to secure capacity, to secure service capacity, to secure the right tools, the right technology, the resource that they need to develop those assets and respond to this energy crisis. Hence, we see better condition that give us pricing dynamics environment that we have not seen for a long time.

Great. You mentioned how the second quarter, not to get down in the real near term, but it was performing solidly, which is good to hear. For the full year, Olivier, you've talked about a mid-teens growth guidance. You've talked about a favorable activity mix in the second half of the year between the Middle East offshore, and your margin expansion opportunities for 200 basis points on an EBITDA margin basis. Can you talk about confidence in hitting those targets? Because every day, we hear about inflationary pressure, supply chain disruptions, geopolitical challenges, Russia.

No, I think you have seen that we started the year very well. I think the first quarter was already -- is already on mid-teens growth, we're above double-digit internationally, and we're at above 30% year-on-year in North America market. We are saying that indeed, our second quarter is shaping solidly. I think the market dynamics is in our favor. And we believe that the inflection of -- further inflection of international growth in the second half, the positive pricing dynamics that we see and the market position that -- the mix that I was referring to, the offshore mix accretive, the market dynamics in Middle East, the powerful core with margin expansion capability across the 3 elements of our core, the Well Construction, Reservoir Performance and Production System, are all pointing us to be confident and to further confidence in a full year target. That's where we see it. The Production System has been the one division that had been the most impacted by the supply chain disruption and element of inflation, and you have seen it in the first quarter. But we believe this is set to be addressed. And that will be, over time, resolved and will contribute to the margin expansion as well as our growth as we continue to execute this year.

Olivier, the focus of today's presentation was on the core. But I was wondering if you could talk about opportunities within New Energy. let's start maybe there?

Yes. Obviously, we continue to invest for the future chapter of the company. We have decided about 2 years ago to create New Energy chapter, where we are focusing on the venture and on business opportunity that leverage our subsurface domain; our focus on technology industrialization; and can use our scale, our breadth of market reach. And we have made investment into hydrogen; we have made investment into geo-energy and geothermal; into lithium, direct lithium extraction, a unique process; energy storage; and finally, CCS. So all these ventures are progressing to milestones. We are in a phase where we are derisking this investment, preparing them for scale. And continue to scan the market for the right investment in technology or/and develop organically our capabilities so that we are ready for scale when this market really scaling and adopting our technology. So this would happen in the next few years. And on a phase of venture adventure from this decade to the next. So we are confident in our portfolio. It's a portfolio that is, I would say, diverse, that has exposure to different domains in the New Energy. And we are hedged across different domains, hedged across different industry sector. Hence, we believe we have the right mix to face that New Energy opportunity.

Okay. I wanted to ask you about digital. I think 1 of the most unique aspects of your business is your Digital segment. Can you give some -- the investors on how recent trends have been developing in digital?

Yes. As I've been commenting earlier, and I mentioned it into the prepared remarks, I think the first digital has been recognized over the last 2 years because of the pandemic, possibly, as one vector of performance differentiation for the operators. They all recognized that using digital, they can step-change productivity of the geoscience team, fast track some development, accelerate the development cycle, but also create more efficiency in operation and extract more from the existing reservoir and the existing assets. So when you put it all together, the investment in digital, because the cash is there to be used by the operators, give an opportunity for fast adoption of digital as a new attribute for this cycle. That's really something that is really step-changing. And we see that has well established a very clear leadership into our technology position pre-pandemic with our new cloud-based platform and our historical desktop solution that had been there for 20 years and leading the market. We're in a unique position to leverage that desktop offering we have and help all of our customers transition to our cloud-based solutions. So we are seeing an accelerated pace of adoption and transition, one customer at a time. And this would be a long tail. This will be something that would take years. And we see it every quarter, every month, there is a new customer joining this digital journey of going from the desktop offering to a fully comprehensive cloud-based open solution that we are providing the industry. Best example is Chevron. Chevron has initiated that 2 years ago in late '19 and has completed most of their transition with success and is very pleased. And a consequence is that it generates a new revenue stream because we -- when we deploy this for an existing customer, we almost -- we -- every time we have to deploy data services to transform the data set for our customers to be ready for the cloud, it unlocks new workflows. We invent new outflows with customers through AI or through capability we have, and it consumed a much greater set of compute cycle. We see an adoption of the simulation, the adoption of the modeling. To just derisk the asset, there is development, hence, customers consuming cloud compute cycle at a greater scale than we had anticipated, and this generates new SaaS revenue stream for us. So it's a combination of revenue stream that comes in addition to the core transition to the cloud.

Any sense of how -- or give investors a sense of how large the customer installed base and the stickiness of the earnings power here.

I think we have been commenting before that we have in excess of 1,500 customers in digital -- in our digital offering, built over 25 years or 30 years of building a desktop premier solution. That is the one that is used by most, if not all, customers. And this is the customer base we have. There is a lot of stickiness into the workflows, into -- the solution that our customers are using is very -- I will make a parallel with Microsoft Office. Everybody is using Microsoft Office, has used it in the past and has benefited from this desktop offering. And everybody has transitioned to Microsoft O365. And I think this is the same transition we are doing. And we are addressing customers one by one and offering the solution to transition there. So there's a lot of stickiness into the opportunity for the customer to adopt this over time. And the pricing power is unique in that sense, that we have a unique offering, we have unique science, engine and technology behind. We have developed a technology stack that is quite unique in breadth and in quality, working with the best-in-class provider of cloud provider, from Microsoft to Google, IBM and AWS. So we are fairly -- we are ready to take the challenge both in on-prem, hybrid or full public cloud offering.

Great. Let's shift gears a little bit. Can you talk a little bit about the company's fit-for-basin strategy in North American and international markets? And what are some of the key technologies you're utilizing to unlock new resources for your customers?

I think fit-for-basin was something we launched as we rolled out the new strategy 3 years ago. And the purpose was to address what we believe is unique in this industry, the opportunity to make every operator benefit from the best-fit technology in the basin where they operate. So we decided to tailor our technology, use a platform approach to create new-fit technology in every basin that are addressing the very specific challenge that our operators are facing, be it geological change or be it operational change. We have been very successful into this. This approach is very much liked by our customers because it help them perform and differentiate in their basins. We have been publicizing a lot of example of that, be it on the well construction space in North America. Or in the testing space in North America, where we have fit solution for North America to replace multiphase metering and multiphase separation with a very fit solution for the North American market. Or in Middle East, we have some tailored measurements for some unique field that, when deployed, help the customer save BHA, hence save significant rig time. And as such, give us an opportunity to share the value of these savings. So this adoption is accelerating. And we have changed our strategy to adopt and to make the provision for this fit-for-basin technology development.

Great. I wanted to ask you a little bit about cash return. On the first quarter call, Schlumberger increased its base dividend by 40%. And I wanted to see if we could hear about your thoughts on the potential for Schlumberger to migrate to some sort of a capital returns framework. I know you have a big analyst event at the end of the year. But just maybe some thoughts on that.

No, I think we -- what we did in -- we did a critical decision in the first quarter, reaffirming our returns-focused strategy, as we had the confidence that the growth cycle will give us the opportunity to complete the deleverage and return incremental cash to the shareholders, at the same time, give us the still opportunity to support our growth investment. Now I cannot and I will not comment and disclose ahead of the Capital Markets Day, but be assured that we are focused on a return-focused strategy, and we will be balancing and making sure that we don't miss the opportunity in this cycle to support the returns to shareholders.

Great. I did want to ask you about your Investor Day. It's in November, you're holding your Investor Day. And I know you're going to have -- you can't give us a lot of specific thoughts. But I wonder if you could give us a preview of the event and some of the key objectives of the upcoming update.

Yes. I think the event with an opportunity to update everyone on our strategy. The specifically on the 3 engine of growth and the way they shape up on different strategic horizon, the core, digital and New Energy. Will be an opportunity to set ambition, a financial ambition, short- and long-term ambition for the company, expanding significantly our market valuation. And an opportunity, back to your last question, to document and to disclose the capital return framework that will help articulate the shape, the size of our return to shareholder framework going forward.

Olivier, we're out of time. Thank you so much for spending time with us today at the conference. I appreciate it.

Thank you, Arun. Thank you very much.