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

Good morning. My name is Kate, and I will be your conference operator today and would like to welcome everyone to the fourth quarter SLB earnings call. [Operator Instructions] As a reminder, this call is being recorded. I will now turn the call over to James R. McDonald, Senior Vice President of Investor Relations and Industry Affairs. Please go ahead.

Thank you, Kate. Good morning, and welcome to the SLB Fourth Quarter and Full Year 2024 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. For more information, please refer to our latest 10-K filing and other SEC filings, which can be found on our website. Our comments today 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 and full year earnings press release, which is on our website. Finally, in conjunction with our proposed acquisition, SLB and ChampionX have filed materials with the SEC, including a registration statement with the proxy statement and prospectuses. These materials can be found on the SEC's website or from the parties' 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. This morning, I will begin by discussing our fourth quarter and full year results. Then I will provide an update on the evolving macro environment and our early activity outlook for the first quarter and the full year. And finally, I will describe how SLB's diverse portfolio is uniquely positioned to continue delivering strong financial results in 2025 and beyond. Stephane will then provide more details on our financial performance, and we will open the line for questions. Let's begin. We concluded the year with solid earnings and free cash flow, growing revenue both sequentially and year-on-year and maintaining our cycle-high margins. Although the rate of upstream investment growth continued to moderate during the quarter, SLB benefited from our broad exposure to global markets, the diversity of our portfolio across the upstream oil and gas life cycle and from our differentiated digital offerings. Notably, we saw strong growth in the Middle East, where once again, we achieved a new quarterly revenue high with contribution from the UAE, Iraq, Kuwait and Qatar. And we also performed very well in North America, where we benefited from a higher activity in U.S. land, along with higher digital sales in the U.S. Gulf of Mexico. Despite the well-known declines in Saudi Arabia and in Mexico, our fourth quarter financial performance remained consistent and resilient. This demonstrates the strength of SLB diversified portfolio. Overall, we closed the year with fourth quarter international revenue reaching a new cycle high, and we generated strong free cash flow of $1.63 billion for the quarter. Turning now to the full year. We achieved our full year adjusted EBITDA margin target of 25%, generated robust free cash flow of $4 billion and returned $3.3 billion to shareholders. Across the core divisions, we grew by 9% compared to the previous year. Production Systems led the way, growing by 24% and expanding margin by almost 300 bps for the full year. This performance was supported by double-digit revenue increases in surface systems, completions and artificial lift, leading to 9% organic growth for the division that was complemented by the Aker subsea acquisition. Reservoir Performance also continued its momentum, growing by 9% year-on-year and expanding margin by approximately 100 bps with strong stimulation and intervention activity. And in Well Construction, although revenue was flat year-on-year, it continues to lead margins in the core. Overall, across our core divisions, our technology leadership, domain expertise and scale are enabling us to continue innovating tailored solutions for our customers in every region. And I'm proud to share that our fit-for-basin revenue crossed $1 billion for the first time in 2024. This was also a very exciting year for digital as demand for products and services continue to accelerate and we formed strategic partnerships with industry leaders, including NVIDIA, Amazon Web Services and Palo Alto Networks. Our customers continue to embrace the power of cloud computing, AI and digital operations to shorten cycle times and improve operating efficiencies. And this led to digital revenue growing 20% for the full year. exceeding our targets of high-teens growth. Finally, we continue to increase our exposure beyond oil and gas. There is a significant growth momentum in the low-carbon markets where we have a strong position through our portfolio of technologies for carbon capture and sequestration, geothermal and critical minerals. And we are complementing this with growing exposure to data center infrastructure solutions by responding to hyperscalers to deliver solutions that meet the demands of a rapidly evolving digital landscape. Combined, revenue from these activities exceeded $850 million in 2024, and we expect this to increase significantly in 2025. As you can see, we are pursuing a wide range of opportunities within and beyond oil and gas, and this is positioning us to benefit from a very diverse mix of new and existing customer spend. I want to thank the SLB team for delivering this progress. We should all be proud. I'm very impressed by our team's innovative spirit, customer centricity and performance mindset, and look forward to building on our successes in the year ahead. Next, let me discuss the evolving macro environment. On the back half of 2024, customer adopted a more cautious approach to near-term activity and discretionary spending, primarily driven by concerns of an oversupplied oil market. Although these concerns persist, we anticipate the oil supply imbalance will gradually abate. Global economic growth and a heightened focus on energy security, coupled with rising energy demand from AI and data centers, will support the investment outlook for the oil and gas industry throughout the rest of the decade. Looking at the global oil supply, we expect that OPEC+ will maintain its focus on commodity price stability throughout 2025. And in the U.S., the ongoing focus on capital discipline by operators will limit near-term supply growth in the region. In this environment, the current level of global upstream investment seems to be keeping the market in balance, absent of any further geopolitical disruptions. Overall, we expect global upstream investment to be steady in 2025 compared to 2024, with the deceleration in some resource plays being offset by resilient growth across select countries and customers. Let me now provide a bit more detail on our 2025 activity outlook. In international markets, while certain countries will continue to expand strong growth, this will be balanced by reducing spending in others. For instance, in the Middle East and Asia, increases in the United Arab Emirates, Kuwait, Iraq, China and India will be offset by declines in Saudi Arabia, Egypt and Australia. In Latin America, growth in Argentina and Brazil will be tempered by decreased spending in Mexico and Guyana. And in Europe and Africa, growth in North Africa, Nigeria, Azerbaijan and Kazakhstan will be more than offset by declines in Scandinavia and West Africa. Turning to North America. Oil and gas activity is expected to decline due to lower publicly announced CapEx in U.S. land, higher drilling efficiency and a slow recovery in gas until LNG capacity expansions are resolved. However, our data center infrastructure solutions revenue is growing rapidly in this region, supporting growth outside of our core business. Specific to the offshore markets, we expect a muted environment in 2025 attributed to white space in deepwater activity, particularly in the North Sea, Australia and Angola, Central and East Africa. Looking ahead, we anticipate this white space in deepwater to start improving as the year progresses in preparation for the significant number of FIDs ramping up in 2026 across several deepwater basins. Let me now describe how this activity dynamics will unfold across the divisions. In Digital & Integration, we expect revenue to remain steady year-on-year with growth in digital being offset by a decline in EPS due to the Palliser divestiture. Digital will maintain its very strong growth momentum with full year revenue growth in the high teens, supported by digital operation and data and AI solutions. Meanwhile, in the core, we expect revenue to be flat year-over-year with modest growth in Production Systems and Reservoir Performance, offsetting the decline in Well Construction across regions. In Production Systems, growth will be driven by artificial lift, completions, valve and midstream production systems, while Reservoir Performance will be supported by intervention and unconventional activity growth in international markets. Overall, when excluding the impact of ChampionX, we expect the mix of geographies and division I just described to result in a steady revenue outlook for 2025. This would translate into adjusted EBITDA dollars and margins being at or above 2024 levels. Now turning to the first quarter. We expect revenue and adjusted EBITDA to be at similar levels as last year, in line with our full year guidance. This will be followed by an activity rebound in the second quarter, particularly in international markets. Finally, let me discuss why I believe SLB is the best positioned company to navigate the evolving market dynamics that I just discussed. Looking at the evolution of the market in 2025 and beyond, SLB size, digital leadership, integration capabilities and performance advantage are differentiators. Our diversified portfolio across global operating areas and business line and our combined exposure to short- and long-cycle projects bring resilience, enabling us to navigate regional and market fluctuation. For example, our digital business is growing with accretive margins at an elevated rate, as customers embrace the power of this data and AI to drive performance and efficiency across their workflows and producing assets. Our integration capabilities are shaping our engagement with customers beyond NOCs, allowing us to add further resiliency and diversity against the industry backdrop. And production recovery is becoming a larger part of our business as customers work to maximize their producing assets, and this will be further enhanced by the contribution from ChampionX. Furthermore, and as illustrated in our success in 2024 across low-carbon and digital infrastructure, we are developing new growth pathways beyond oil and gas in fast-growing markets decoupled from the upstream sector. As you can see, we're operating from a very strong position. And as we remain focused on cost optimization and process enhancements, leveraging digital transformation to become a more efficient organization, this will support a margin expansion journey. The combination of strengths I've just described, along with our continued business performance, provide us with confidence in our ability to continue delivering strong cash flows and increased return to shareholders. You have already seen the action we have taken in our earnings release today as we increased our dividend and accelerated share repurchase to start the year. I will now turn the call over to Stephane to discuss this announcement and our financial results in more details.

Thank you, Olivier, and good morning, ladies and gentlemen. I will start by providing an overview of our full year results before getting into the specifics of our fourth quarter performance. Full year 2024 revenue of $36.3 billion grew 10% year-on-year with the acquired Aker subsea business accounting for half of the growth. Organic revenue grew 5%, entirely driven by the international markets. This was led by the Middle East, which grew 19% year-on-year to reach a record high, despite the well-publicized headwinds in the second half of the year. International pretax segment operating margins of 21.4% improved 44 basis points year-on-year. With more than 2/3 of our international GeoUnits experiencing both top line growth and margin expansion year-on-year. In North America, full year 2024 revenue declined 1% compared to the previous year. However, pretax segment operating margins of 17% only dropped by 23 basis points with pricing pressure mostly offset by a favorable technology mix, cost efficiencies and higher digital revenues. From a division standpoint, organic growth was led by Digital & Integration, which grew 10% year-on-year, entirely driven by our digital business. On a full year basis, digital revenue of $2.44 billion grew 20% year-on-year, supported by close to 35% growth from cloud, AI and edge technology. Our digital business was accretive to both SLB's overall revenue growth and its global margins. Finally, our full year adjusted EBITDA margin of 25% increased by 52 basis points year-on-year, reaching the highest levels since 2015. Turning to the fourth quarter results. Fourth quarter revenue of $9.3 billion increased 1% sequentially, driven by record-high digital revenue. From a geographical perspective, the Middle East led the way with 5% sequential revenue growth, driven by the start-up of unconventional gas activities in the United Arab Emirates as well as strong performance in Egypt and Qatar. Adjusted EBITDA margin for the fourth quarter reached a cycle high of 25.7%. It is 33 basis points higher than the same period of last year. Fourth quarter earnings per share, excluding charges and credits, was $0.92. This represents an increase of $0.03 sequentially and $0.06 when compared to the same period of last year. We recorded $0.15 of net charges during the fourth quarter. This included $0.10 of impairment relating to certain equity investments and fixed assets, $0.04 in connection with our ongoing cost-out program, $0.03 of merger and integration charges relating to the Aker subsea and ChampionX transactions, and a $0.02 gain on the sale of an equity investment. Let me now go through the fourth quarter results for each division. Fourth quarter Digital & Integration revenue of $1.2 billion increased 6% sequentially, driven by 10% growth in digital, while APS revenue was essentially flat. Pretax operating margin expanded 274 basis points to 38.3% as a result of higher digital sales and cost efficiencies. Reservoir Performance revenue of $1.8 billion declined 1% sequentially on reduced intervention and stimulation activity. Margins increased 35 basis points to 20.5% due to improved profitability in evaluation services. Well Construction revenue of $3.3 billion decreased 1% sequentially, and margins contracted 70 basis points, primarily due to lower drilling activity in Mexico and Saudi Arabia. And finally, Production Systems revenue of $3.2 billion increased 3% sequentially on higher international sales of artificial lift, midstream production systems and completions. Pretax operating margins decreased 93 basis points to 15.8% due to lower profitability in subsea partially offset by improved profitability in artificial lift and midstream production systems. Now turning to our liquidity. We generated $2.4 billion of cash flow from operations and $1.6 billion of free cash flow during the fourth quarter. This strong performance resulted in full year free cash flow of $4 billion. As a result, we reduced our net debt by $1.1 billion during the quarter to $7.4 billion. This represents our lowest net debt level since the first quarter of 2016. Capital investments, including CapEx and investments in APS projects and exploration data, were $759 million in the fourth quarter and $2.6 billion for the full year. Looking ahead, we will continue to be disciplined as it relates to our capital investments. In 2025, we expect to reduce capital investments, excluding the impact of ChampionX to approximately $2.3 billion, with the CapEx portion at the low end of our previously shared guidance of 5% to 7% of revenue. During the fourth quarter, we repurchased 11.8 million shares of our common stock for a total purchase price of $501 million. For the full year, we returned a total of $3.3 billion to our shareholders in the form of dividends and stock repurchases. With continued focus on capital discipline and clear visibility into strong cash flow generation in 2025, we are committed to increasing returns to shareholders once again this year. When combining the increased quarterly dividend that was announced today with increased share repurchases, we are targeting to return a minimum of $4 billion to our shareholders in 2025. Notably, as you saw in our earnings announcement this morning, we entered into accelerated share repurchase transactions to repurchase $2.3 billion of our company's common stock. These transactions not only reflect our confidence in our continued financial performance, but also our belief that our stock is undervalued relative to the strength of our business. Furthermore, this will accelerate the repurchasing of shares that will be issued in connection with the pending ChampionX transaction. As it relates to ChampionX, the transaction received CFIUS clearance in December. And the engagement with other regulatory authorities is progressing well. We continue to work toward closing the transaction before the end of the first quarter. With respect to our other pending transaction, we expect the divestiture of our interest in the Palliser APS project in Canada to close in the next few months. I will now turn the conference call back to Olivier.

Thank you, Stephane. Kate, I believe we are ready to open the floor to the questions.

[Operator Instructions] Your first question comes from the line of Dave Anderson with Barclays.

So in your outlook, talking about the outlook for international upstream spending, from a flat outlook overall but a lot of puts and takes in there as you were highlighting. I was wondering if you could sort of simplify a little bit in terms of Schlumberger's exposure, kind of where are the 2 or the 3 regions or countries that are kind of have the most upside for you or have the potential to get better? And kind of maybe where are the kind of 2 or 3 regions that could potentially get worse? Like where is the sort of the upside and the downside scenarios in your international outlook?

Yes. I think I will start with the Middle East at-large. The Middle East at-large being impacted, as you all know, by the decline of activity, sequential decline of activity in Saudi is still a very bright spot when it comes to multiple countries and multiple customers having their commitments, ongoing commitment to either expand capacity in oil capacity for the future, such as UAE, Iraq and Kuwait and gas. Gas, unconventional gas or conventional gas across the region is becoming a theme that will result into 40% expansion from 2020 to 2040 of gas production. So these resilient commitment, this resilient budget are resulting in growth that is very -- is offsetting the decline we are seeing in the -- partly in Saudi and, to a lesser extent, in the -- in Egypt and offsetting globally as the Middle East as a region with, in our opinion, still long-term resilient, if not long-term growth. And I believe that the short-cycle activity, that was a bit suppressed in the last few months will come back as a result of the oil oversupply to be abated over time and resulting to this combination of more short-cycle and this long-cycle project gas unconventional and oil capacity all again, running at all cylinders. So I believe Middle East first is certainly a bright spot, and will continue to be an advantaged basin for us and the international market. Secondly, despite the commentary I put on the deepwater of still having quite a lot of white space and resulting into lower activity than could have been anticipated in 2025 in certain basins, certain resource plays. I believe that this first is creating the condition for these rigs to be picked up later in the anticipation of the FIDs that are piling up, and that will result in 2026 and '27, partly. You are fully aware of Suriname, the Namibia, the Indonesia, the Southeast China and other parts of the globe where exploration has been very active in new basin and return in the coming quarters, in the coming months into appraisal and into FID. So I'm still optimistic long term and very constructive about the deepwater despite a gap this year created by this activity. But yes, this is what I will recommend to look at from international. I would conclude by maybe the gas, international gas market is still due to security in Asia due to regional demand in the Middle East will still drive long-term investments and unconventional activity across the international market.

And perhaps we could shift the focus a little bit on the production side of the business. This is an area where kind of in your portfolio is becoming a bigger part of the mix. as you added in Aker and as we're pulling in ChampionX going forward. You highlighted kind of pro forma, it was about 9% year-on-year growth, kind of excluding Aker in overall Production Systems. Looking forward, how are you viewing sort of the growth trajectory of kind of the overall production-driven business? Should that be high -- I mean, 9% as a starting point? Where does it go from here when you kind of fold everything in? Is this like a -- do you see kind of high single digit, low double digit going forward? Do you have enough visibility to kind of help us understand that? Because that seems to be the part of your business that could be showing much greater growth in the next few years.

Yes. I think as you have seen in our commentary, Production Systems will be having positive growth driven by this production recovery. We are seeing that Reservoir Performance is pulled this year by intervention and stimulation production recovery activity. So these things are here to stay. The investment we're making in technology, the investment we are making in our portfolio, the investment we are making in creating integration opportunity in this space is resulting this year into visible growth pool in the Middle East across deepwater basin into this. So we are very positive that this will become a long-term earnings potential for us. It will become more and more a backlog driven, a significant part of our mix in the long term, albeit related to OpEx albeit related to long-cycle CapEx. So we are very constructive about the long-term future of production recovery. This is a ground challenge, I would say, that the industry is facing to ultimately increase the recovery and demonstrate that digital integration and feed technology can uplift the recovery factor of the most of the basins and can improve the production of existing producing assets. And it's true from U.S. shale to Middle East to basin -- deepwater basin. So I think this is something that we are strategically investing into from technology, from portfolio. And that's something where we are starting to see the benefit as this year, indeed, the production recovery across the Reservoir Performance, across Production Systems and in digital will outpace the growth we see from exploration and development in 2025 and expect this to continue going forward.

Your next question comes from the line of Scott Gruber with Citi.

Good color on the market. I guess following on from Dave's question just around the outlook for international activities and revenues. Do you expect a normal sequential improvement in 2Q or the second half of the year going to be a little bit higher weighted? Kind of just how do you see the shape of the year progressing? Is it normal or a little bit more kind of second half weighted?

No, I think it's fair to assume that we see the typical pattern of a low first quarter, followed by a rebound in the second half and followed by late in the year, strong activity in part in some resource plays and including the upside that we foresee that could materialize in deepwater. But yes, I think it's an H2 higher activity and higher, I would say, upside to some extent, following an H1 pattern that we have a low in Q1 resulting from the seasonal effect and also resulting from the sequential decline from some of the highs we had in the fourth quarter, as you may have seen with our record-high international revenue.

Got it. And are you able at this juncture to comment on Russia and the continuity of your operations there? Have you had a chance to digest the latest sanctions language? And I think you can you maybe provide an update of just kind of overall contribution of the business?

Yes. Let me comment on this. Our revenue in Russia continues to decline and accounted for 4% of our global revenue in 2024, down from 5% in previous year. And as you know, since the start of the conflict, we have taken voluntary measure to curtail our Russia activity, including halting shipments of product and technology into Russia from all SLB facilities worldwide in 2023. And actually, we are reviewing the new U.S. sanction. And at this point, we believe that our voluntary measures are aligned with the new sanctions.

Your next question comes from the line of Arun Jayaram with JPMorgan.

Olivier, I wanted to see if you could provide maybe a little bit of clarity around the updated outlook for 2025. Is it fair you expect flattish revenue on a stand-alone basis and adjusted EBITDA at or above 2024 levels? Is that -- I just want to make sure that I have that correct.

Yes. I think, this is -- you correctly captured what we prepared and disclosed in our prepared remarks. Indeed, we foresee that the mix of activity, both international and the U.S., the mix of the give and takes that are very contrasted this year will result into a flat also revenue outlook globally and will result into also our ability to deliver earnings, EBITDA dollar to be at or above 2024, excluding all of this, excluding ChampionX.

Okay. Got it. Got it. And just maybe you could elaborate. You mentioned how in some of your non-oil and gas segments, low-carbon solutions, carbon capture, minerals, data center solutions that you're seeing, what could be some significant growth in 2025? Can you just provide maybe a little bit of thoughts? I think you cited $850 million number for 2024. What kind of growth are you -- could we see at that level?

I'll take this maybe, it's Stephane. So yes, just to unwrap it a little bit that more than $850 million is made of low-carbon activities, for example, carbon sequestration and capture and geothermal as well as new activities we have started in 2024, which relate to the data center infrastructure solutions. So altogether in 2024, this was more than $850 million. And just to clarify, some of these activities are recorded as part of our core business, such as carbon sequestration, geothermal where we provide reservoir characterization, drilling services or even digital solutions. So some of this is captured in the relevant core divisions or in digital. And some of the other activities, such as carbon capture, like our Capturi joint venture, is captured under the other category in our divisional reporting. So this is just to clarify. Now going forward, this is growing very fast, faster than our core business. So this is providing another way to offset some of the headwinds on the core business and is particularly growing on the CCS side, on the geothermal and those data center infrastructure solutions I mentioned.

Your next question comes from the line of Neil Mehta with Goldman Sachs.

I just want to talk about the share repurchase program. You indicated that you wanted to accelerate the authorization. How do you think about taking advantage of some of the volatility in the stock? And you said at least $4 billion, so how do you think about capturing upside to the extent the free cash flow materializes?

Sure, Neil. So first, you mentioned it. Our goal here with especially the accelerated share transaction is to take advantage of what we believe is a low valuation for our stock as we -- especially as we start the year. So mechanically, what we did is we paid $2.3 billion upfront to the banks, which are helping us with this program. We paid that $2.3 billion actually earlier this week, and we received delivery on January 13, exactly of approximately 48 million shares of our stock, and this represents about 80% of the total shares to be bought under the program. So those shares, those 48 million shares were delivered to us and are now removed from our outstanding share count. Now there will be a true-up in the next few months before the end of May. The banks go at their pace, but the deadline is end of May. There will be a true-up based on the volume-weighted average price of the shares minus the discount, and then we will receive the remaining shares. So with all this, there's $2.3 billion of shares that can be removed right away from our outstanding share count and at what I believe is a very favorable price. To the second part of your question, that $2.3 billion is to take care of the majority of what we include in the total $4 billion returns to shareholders. So we mentioned this $4 billion is indeed a minimum. We do have the option to increase -- we will -- if we increase this $4 billion, it will be only in the form of additional buybacks. So you -- we will -- we can go -- we will go a bit above the $2.3 billion because this was just a high-level estimate of the total for the year. So we will go slightly above, but we can go even beyond that to exceed the $4 billion total returns to shareholders. We'll decide this as we -- as the year unfolds, depending on how much the ChampionX businesses, for example, will contribute to free cash flow once the transaction closes, depending on our free cash flow performance and in the year and potential M&A opportunities. But there is clearly the option to increase that $4 billion total returns.

Okay. That's very helpful. And then the follow-up is just can you just talk about where we stand in helping the market better isolate the value of the digital business? I know Canada was an important piece of it. And then maybe post ChampionX, there could be some segment re-segmenting. So just how do we think about that $3 billion number and when we can get a little bit more clarity about the multiyear outlook for it on a stand-alone basis?