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

Good morning. My name is Megan, and I'll be your conference operator today. I would like to welcome everyone to the first 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, Megan. Good morning, and welcome to the SLB First Quarter 2025 Earnings Conference Call. Today's call is being hosted from Houston, following our Board meeting in the Middle East last 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. 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 reconciliations to the most directly comparable GAAP financial measures can be found in our first quarter 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 for the proxy statement and prospectus. These materials can be found on the SEC's website or from the party's 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'll begin by discussing our first quarter performance, then I will provide updates on the evolving macro and how we'll manage our business in this uncertain environment. Stephane will then provide more details on our financial performance, and we'll open the line for questions. Let's begin. As you have seen in our earnings press release this morning, it has been a soft start of the year. In addition to the typical seasonal activity decline in the Northern Hemisphere and the absence of year-end product and software sales, upstream investments has remained constrained by the oversupplied oil markets. This has been amplified over the past few weeks with additional economic uncertainty stemming from the acceleration of supply releases by OPEC+ and recent tariff announcement. Against this more challenging backdrop, I was proud to see our teams continue to deliver for our customers, and we finished the year -- the quarter by achieving further adjusted EBITDA margin expansion year-on-year. Overall, across the business, first quarter revenue decreased by 3% year-on-year as our strong results in North America were more than offset by lower revenue in the international markets, attributed to a combination of lower drilling activity in Mexico and Saudi Arabia and a steep decline in Russia. Excluding declines in these 3 countries, international revenue was steady year-on-year, and we achieved double-digit growth in a number of markets, including the United Arab Emirates, North Africa, Kuwait, Argentina and China as well as a solid performance in Europe and Scandinavia. Altogether, this resulted in international rig count outperformance. Turning to North America. We delivered positive results driven by the offshore market with higher sales of both digital and subsea production systems. We also saw continued growth momentum in our data center Infrastructure Solutions business in this region. However, this growth was partially offset by lower drilling revenue in U.S. land due to weak efficiency gains. Next, let me discuss the performance of our divisions. In the core, Production Systems continued to lead the way with steady revenue growth and further margin expansion. Customers continue to demonstrate strong demand for Surface Production Systems, completions and artificial lift. And this late cycle business is becoming more profitable with margins increasing by 197 basis points year-on-year, supported by a favorable activity mix, execution efficiency and conversion of improved price backlog. Specific to Subsea, we remain constructive on the market outlook with a significant pipeline of projects planned over the next couple of years. I was pleased to see margins in this area expand materially compared to the same period last year as a result of strong execution and the realization of cost synergies within our Subsea -- OneSubsea joint venture. In terms of our performance, revenue was slightly down year-on-year, and margins were significantly impacted by challenges on several new projects that resulted in start-up and operational cost overruns. We continue to see strong demand for unconventional stimulation in international markets, including the United Arab Emirates and Argentina. However, this was fully offset by lower evaluation and exploration activity as a result of lingering white space in deepwater. Well Construction, revenue declined year-on-year due to lower drilling activity across both North America and international markets. Despite this decline, I was pleased to see that 1/3 of our international units actually grew year-on-year in the first quarter. In Digital & Integration, growth was entirely driven by digital, where revenue grew 17% year-on-year as customers continue to embrace digital technologies and solutions. Customers accelerating the adoption of digital and AI solutions to extract further efficiency and performance across the upstream life cycle, both in planning and in operations across development and production. In the earnings press release, you can see several examples of customers adopting our digital solutions. Finally, as an update on our progress beyond oil and gas, we continue to experience positive momentum in the low carbon market, driven by Capturi acquisition as well as in our Data Center Infrastructure Solutions business. Combined, revenue from CCS, geothermal, critical minerals and data center solutions is on pace to visibly exceed $1 billion in 2025. Overall, I'm proud of the performance our team delivered this quarter, and I want to thank the entire SLB team for their hard work and commitment to customer success. Next, let me discuss the macro environment and our SLB is adapting accordingly. The industry is navigating global economic uncertainty stemming from the supply-demand imbalance and recent tariff announcement. In this environment, commodity prices are challenged. And until they stabilize, customers are likely to take a more cautious approach to near-term activity and discretionary spending. Beginning with the supply-demand balance, we expect to see new supply enter the market as OPEC+ has announced plan to increase their production beginning in May. This comes at a time where the macroeconomic picture remains uncertain due to global trade concerns, which have the potential to result in lower liquid demand than originally expected for the year. Taken together, these factors are resulting in an uncertain market backdrop. At this point, we expect global upstream investment to decline compared to 2024, with customer spending in the Middle East and Asia being more resilient than other regions across the rest of the world. Against this uncertain backdrop, we remain focused on what we can control. We'll continue to execute our strategy, deliver differentiated performance for our customers, carefully manage costs and remain committed to returns to shareholders. In the core, we remain positive on the long-term fundamentals for oil and gas, and we will continue to deepen our partnership with our customers throughout the life cycle of their assets. This includes an increased emphasis on the production and recovery market, where we expect to unlock new growth potential and long-term resilience through opportunity for technology deployment. In digital, customers are investing in solutions to reduce cycle time, improve performance and drive efficiency, and we continue to pursue opportunities in AI, cloud computing and digital operations. Today, we are seeing the decoupling of digital investment from upstream spending, and this will increasingly represent a unique and exciting opportunity for our business. In our business beyond oil and gas, we'll continue to capitalize on low carbon market with our new energy offering, particularly in carbon capture and geothermal while harnessing adjacencies as we have demonstrated with our rapidly growing data center infrastructure solutions business. Let me quickly elaborate on our data center business. Over the past 2 years, we have engaged hyperscalers whom we partner with in digital to unlock new opportunities for our business through the development of data centers. This resulted in a significant contract award for the provision of manufacturing services and modular cooling units, which we are currently fulfilling. Based on our performance and unique capabilities, we are also gaining access to new opportunity pipeline, and we are expanding our technology offering with low-carbon solutions to serve new potential customers. Overall, this is a very exciting and fast-growing market, driven by AI demand and we expect it to contribute to our diversified exposure beyond oil and gas in the coming years. Beyond our operational performance, we also have been on a journey of cost optimization and process enhancement. And moving forward, this will support our mission to protect margins despite softer customer spending. What matters in this environment is our ability to continue to generate strong margins and cash flows, deliver resilient returns to shareholders and come out stronger. Our first quarter results demonstrate our ability to do this. And I believe that the combination of our strategy and cost actions will help to protect our business moving forward. As a result, we remain committed to return at least $4 billion in returns to shareholders in 2025. Now before I hand over to Stephane, let me quickly share our guidance for the second quarter and the rest of the year. Specific to the second quarter, assuming there is no further escalation of tariffs and that oil price remains approximately at current levels, we expect revenue to be flat sequentially, excluding ChampionX, with an adjusted EBITDA margin expansion between 50 to 100 basis points. Looking at the full year, while a number of different scenarios could materialize, including tariffs and OPEC+ actions. Assuming oil price remains similar to current level, we expect flat to mid-single-digit revenue growth in the second half of the year compared with the first half, excluding ChampionX. This will be supported by a combination of the seasonal activity uptick, new start-up in deepwater and further growth in our digital and data center business. And under these conditions, we also expect further margin expansion. Look, I know there is a lot of uncertainty in this market, but we have been here before. We're operating from a strong position and have a clear priority of preserving margins while generating robust cash flows. Our broad exposure is providing resilience against uncertainty and short cycle weakness as you have seen in our results today. And I'm confident that our people, our technology leadership and our financial strength will clearly position us for long-term success. I'll now turn the call over to Stephane to discuss our financial results in more detail.

Thank you, Olivier, and good morning, ladies and gentlemen. First quarter earnings per share, excluding charges and credits, was $0.72. This represents a decrease of $0.03 when compared to the first quarter of last year. We recorded $0.14 of charges during the quarter. This included $0.11 of charges in connection with our cost-out program that we initiated last year and $0.03 of merger and integration charges related to the ChampionX and Aker Subsea transactions. Overall, our fourth quarter revenue of $8.5 billion decreased 3% year-on-year. International revenue decreased 5% year-on-year, largely driven by reduced activity in Mexico, Saudi Arabia, offshore Africa and Russia. North America revenue increased 8% year-on-year due to higher digital and subsea production system sales as well as strong growth in our Data Center Infrastructure Solutions business. Company-wide adjusted EBITDA margin for the first quarter was 23.8%, up 18 basis points year-on-year. Pretax segment operating margin was 18.3%, representing a 60 basis point decline year-on-year as 2 of our 4 divisions experienced lower margins, partially mitigated by the effects of our cost-out program. As we navigate the current market dynamics, we will continue to exercise cost discipline, and we will align our resources with activity levels in the coming quarters as necessary to protect our margins and cash flows. As it relates to tariffs, the evolving landscape clearly introduces uncertainty, which makes it challenging to fully assess their impact at this time. Broadly speaking, we are partially protected by our activity mix with approximately 80% of our revenue derived from international markets as well as by our diversified supply chain network that includes in-country manufacturing and local sourcing. However, parts of our operations are still potentially exposed to increasing tariffs, primarily from imports of raw material into the U.S. in our Production Systems division as well as exports from the U.S. subject to retaliatory tariffs. Under the current tariff framework, the majority of the impact is on import and export flows between the U.S. and China. So any resolution or conversely escalation between those 2 countries can significantly impact the tariffs we may be subject to. While those discussions are taking place, we are taking proactive steps to mitigate the potential impact. This includes reviewing how to further optimize our supply chain and manufacturing network as well as diligently pursuing all applicable exemptions and drawbacks. We are also actively engaging with customers to recover tariff-induced cost increases through contractual adjustments. We have made progress on all these fronts in the last 2 weeks, and we are stepping up those actions across the organization as we speak. As the second quarter progresses and ongoing trade negotiations continue, we will hopefully gain better visibility of where tariffs may settle and the extent to which we will be able to mitigate their effects on our business. Let me now go through the first quarter results for each division. First quarter Digital & Integration revenue of $1 billion increased 6% year-on-year, driven by 17% growth in digital revenue. This growth was partially offset by lower APS revenue due to a temporary pipeline disruption that impacted production in our projects in Ecuador. While this issue has been resolved, it did cost us $0.01 of earnings in the quarter. Digital & Integration margin of 30.4% expanded 380 basis points year-on-year entirely due to improved profitability in digital. Reservoir Performance revenue of $1.7 billion decreased 1% year-on-year as strong unconventional stimulation and intervention activity was offset by lower evaluation and exploration activity. Margins of 16.6% declined 311 basis points as compared to the first quarter of last year due to the less favorable activity mix as well as project start-up costs. Well Construction revenue of $3 billion declined 12% and margins declined 71 basis points year-on-year on significantly lower drilling activity. Mexico and Saudi Arabia alone represented approximately 2/3 of the revenue decrease. Finally, Production Systems revenue of $2.9 billion increased 4%, while margins of 16.2% grew 197 basis points year-on-year. These results were driven by the resilience of our portfolio in production and recovery activities and were augmented by significant revenue growth in our Data Center Infrastructure Solutions business. Now turning to our liquidity. During the quarter, we generated $660 million of cash flow from operations, a significant increase compared to the first quarter of last year. We generated positive free cash flow of $103 million despite the payment of annual employee incentives and the seasonal increase in receivables due to continued capital discipline and working capital management. Despite the uncertain economic environment, we expect our cash flow generation to remain strong and to grow throughout the year, consistent with our historical trends. Capital investments inclusive of CapEx and investments in APS projects and exploration data were $557 million in the first quarter. For the full year, we are still expecting capital investments to be approximately $2.3 billion, excluding any impact from the anticipated closure of the ChampionX transaction. Our net debt increased $2.7 billion sequentially to $10.1 billion. This increase largely reflects the $2.3 billion we spent on our accelerated share repurchase transaction during the quarter. This ASR transaction was completed in April and resulted in us reducing ultimately our shares outstanding by a total of 56.8 million shares. 47.6 million of these shares were received in the first quarter while the remaining 9.2 million shares were received in April. ASR transaction, together with the dividend increase announced last quarter, will allow us to meet our commitment to return a minimum of $4 billion to shareholders in 2025. Let me conclude with an update on our pending M&A transactions. While these transactions are obviously taking more time to complete than initially anticipated, we are pleased with the progress made during the quarter and continue to work towards successful closure. As it relates to ChampionX, as we announced a couple of weeks ago, the United Kingdom Competition and Markets Authority has agreed to consider our proposed actions to address their concerns as part of their Phase 1 review. We will continue our collaboration with the U.K. and other regulators towards an anticipated closing in the second quarter or early third quarter of 2025. With respect to our other pending transaction, we now expect the divestiture of our interest in the Palliser EPS project in Canada to close in the second quarter. I will now turn the conference call back to Olivier.

Thank you, Stephane. I think, Megan, we are ready for taking the questions from the floor. Thank you.

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

So we've heard from a number of other service companies this week on the outlook. So some of them more sobering than others. But I think we're starting to frame sort of some of the potential outcomes for international North America for the rest of the year. You said upstream spending you're expecting to decline this year, but I was hoping you could maybe clarify a little bit how you see international North America from here at these oil prices? And how does this factor into your guide for mid-single-digit growth in the second half of the year in which you have a very different mix than your peers?

No, absolutely. Thank you, Dave, for the question. Indeed, I would like you to clarify. So as you know, and as we have highlighted in the prepared remarks, global upstream spend will be down year-on-year and with higher decline than originally anticipated. There is no argument against that. Not against the current public data independent of the tariff impact itself. It's already slowing down. What is important is how SLB is positioned against this backdrop. And NAM, we see more downside exposure in NAM than international market in this negative revision. But first, if we look at NAM and our position there, we are now tied to rig [ not a ] frac fleet. And actually, we are long in offshore, in digital and in production in this market. And furthermore, we have a data center solution there. So I think if you look at it, our exposure here has been refactored due to the strategy we initiated about 5 years ago, and we're reaping now the benefits of having better resilience against the short-cycle exposure we have as part of NAM because our offshore production market exposure, digital and now the new business. Even excluding the Data Center Infrastructure Solutions, our year-on-year will have been growing year-on-year, proving that resilience is in place for now. Now flipping to international, we see less exposure or less decline proportionally directionally than in North America as the resilience, as I said, of Middle East and Asia, including offshore, including uncommercial, including gas will continue to play a role into holding better this market. So we have the right exposure in offshore. We have the right exposure in gas internationally, partly uncommerional. We are growing, as you have seen our digital and production recovery remain a nice exposure we have across the globe. Speaking of which, I believe that the upcoming acquisition integration of ChampionX will not only enhance our resilience, but improve our mix in North America and give us further digital and further offshore exposure across the world as well. So I feel good about where we are in this cycle. And I think I just wanted to reconcile a bit why we maybe have a differentiated performance going forward, we expect.

Great. Very much appreciate on the different mix here. I wanted to focus on one of your kind of core countries, Saudi Arabia. You mentioned it got off to a bit of a slow start this year. We recently heard another rig company just talked about another rig being dropped. Can you talk how you see Saudi playing out kind of from here for the rest of the year? On the one hand, do you think conventional oil activity maybe picks up later this year with these OPEC barrels coming back in the market? And then you have the unconventional natural gas activity ramping up. So I guess I'm wondering, overall, should we start to see sort of more sustained growth from Saudi starting later this year and into 2026. A lot of moving parts here, if you could help us understand those.

Yes, a lot of moving parts indeed. And I think, again, you have to step the clock back to what happened last year. I think an adjustment of the ambition from 13 to 12 MSC that has led to a steep decline of activity that is translating into what we are seeing today year-on-year on our rig-related activity. Now when it comes to this year and next, I think indeed, the priority of the Kingdom are clearly to stabilize production and to be able to respond to this OPEC+ pool as they materialize in the short term at least and to continue to execute the gas ambition to grow 40% the gas and beyond by 2030. And as such, the gas land and unconventional gas will remain a priority that we'll see and receive further activity increase. Now is there pending further reduction to adjust to the level of activity and adjust the commodity price like other country will do, possibly. But I think directionally, the commitment to long-term gas, the commitment to maintain and the activity that relates to maintaining this [ 12 million ] by MSC will indeed represent likely an uptick as we go into 2026 for Saudi. So that's what we expect. So yes, a lot of moving parts, but our exposure there is -- we love our position in Saudi. I was just recently here with a few board members visiting the Kingdom, and I think have the opportunity to measure firsthand the engagement, the -- I would say, the proximity we have and the feedback on our performance that is stellar. And I think we like to keep it that way and thank the team for what they are delivering on the difficult market condition. But yes, I think I believe that the worst is behind us from decline. And if there is some adjustment this year, I believe that the gas-led growth will help us rebound going forward.

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

I want to ask about what EBITDA margin level you think you can defend in a modestly weaker market year-on-year. Previously, with the cost restructuring, it felt like you were targeting to defend 25%. It looks like take a margin slightly north of 25% in the second half to get there this year. But do you think you can get the EBITDA margin back to the 25% level in the second half, excluding the impact of ChampionX?

I think excluding the ChampionX and excluding escalation of tariff, I think -- I believe that if we assume that the scenario condition we have put out with oil price remaining in check with current -- approximately current level and the guidance we gave on the growth in the second half and the leverage we'll have and the realization of our cost-out program, the digital effect and the rest, we'll have the ambition to grow our margin in the second half, and we'll try to keep our ambition to approximately 25% for the full year. That's something that will ambition, but the tariff is a big question mark. And I think if the tariff were to stay or escalate from where they are, obviously, the impact you will have, as Stephane described, I think will have -- will represent a headwind to this margin expansion in the second half.

I appreciate the color. And then turning to digital, how do you think about the cadence of digital growth in this environment? On the one hand, digital is obviously an efficiency enabler. I think in that vein, it could accelerate. But on the other hand, there is some exploration spend, some discretionary spend within the digital mix. How do you think about the resilience of digital growth in this environment? And should we continue to think about that high teens growth rate for the year?

I think this remains our ambition. We believe that I think this secular trend of digital adoption in the industry is actually accelerating. Now there will be some discretionary decision. There will be some pressure here and there. There will be some projects that will be reconsidered. But overall, I think we believe that the realization of the efficiency gain, both productivity for the -- and effectiveness for the planning geoscience workflows and the direct impact on the performance, total cost of ownership for operational workflows, I think is still playing out and resonating very well for our customers at the time they want to extract efficiency. So against global upstream CapEx, I think as we commented in the previous question that we declined year-on-year, we are still seeing mid- to high teens clearly growth into our digital business. Driven by this secular trend that we are fully capturing. Our technology strategy and our platform strategy is clearly playing out. And you have seen the diversity of the award that we get different customers, different regions, geosounds operation progress we are making with many customers across the world.

Your next question comes from Arun Jayaram with JPMorgan.

Olivier, I was wondering if you could elaborate on SLB's strategy kind of to diversify the portfolio beyond oil and gas. I think you mentioned you're on pace to exceed maybe $1 billion of revenue this year versus, I think, $850 million last year. But maybe talk about some of the steps you're taking there and some of the longer-term growth potential.

No. Thank you, Arun. I think -- yes, I think we have initiated about 3 to 4 years ago, a strategy with new energy. I think the major aspect of that, that will continue to impact us in short term are 3 ways. First, CCS, where we took a position to acquire Capturi. And I think we have our SLB Capturi venture that I think is the Capturi technology that I think we have 4 active projects and many projects in the field that will continue to materialize and create a growth pattern going forward. So this, combined with our sequestration adjacent to the core capability in exploration and characterization of this Reservoir Sequestration capability, I think, is leading to visible growth on our CCS business, and this will continue. So we don't see the pattern slowing down. We see this as a long-term market position we want to continue to own and grow. Geothermal, starting from commercial geothermal has been something that has been getting more focus and more adoption for customers. And now there is a lot of pilots on new generation or next-generation geothermal that is being highly supported by the new administration, partly in the U.S. And I believe this is also something that will continue to grow. And finally, I will mention the lithium direct lithium extraction, where I think the pilot we had successfully completed last year, the first pilot at scale in the U.S., I think, is again resonating very well with the critical minerals priority of the current administration. And we see this in South America. We see this in Saudi where we're actually participating into a pilot as well. So this is successful. And separately, you have seen that the data center is something that we have used, I think, the relationship, the engagement we had to position ourselves as a provider of manufacturing capability, manufacturing services as well as modular cooling solutions for this data center. And the success is great. And I think I'm very pleased with the progress of the team. We have a plant in Louisiana that is serving this business, and we have a large contract that we are fulfilling. And that has been an area of growth in North America, and we expect it to continue going forward this year and next, clearly. So yes, the ambition is to go from the $850 million plus to visibly more than $1 billion when we put all of this together. And we do not expect it to slow in '26, but to continue to accelerate.

Great. That's helpful. Maybe my follow-up is for Stephane and maybe just to maybe clarify some of the outlook comments. My team tried to estimate what your outlook comments would translate into 2025 EBITDA. We're getting to somewhere between $8.4 billion to $8.5 billion. I don't know, Stephane, if you could maybe give some color if that makes sense. And maybe the clarification is, how are you treating Palliser and some of the tariff-related impacts in terms of the full year outlook?

So Arun, we will stick with revenue only guidance for the rest of the year, as Olivier mentioned, the growth, assuming current oil price more or less stay at the current level. So we'll stick with revenue. We think it's premature to give you an EBITDA for the second half and hence, for the full year. And some of the reason is indeed the tariff, the application of tariff. We think giving you a number on tariff at this stage would not be useful for financial modeling. Unfortunately, we'd love to, but it's quite difficult. But as I said, we are partially shielded by domestic manufacturing and sourcing, but it is clear if it stays that way, we will have an impact. We will try to mitigate it, and we are already doing that through optimization of supply chain and through ultimately trying to pass the impact to customers. But what matters at the end is that we are still seeing margin expansion in the second quarter despite tariffs being affected now. And this is to the tune of 50 to 100 basis points, as we mentioned, for Q2 sequentially. And for the second half of the year, margin expansion, assuming again that oil price stay more or less at this level, we will have growth in H2, and this will come with margin expansion. But quantifying that margin expansion H1 to H2, it will not be the right thing for us to do today.

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

So as you think about ChampionX, recognize there's some limitations about what you can say around this, but where are we in terms of the gating items at this point? It does feel like we're in the end zone here, but curious -- the red zone, but curious what your perspective is on what remains outstanding and confidence around closing.

Yes. I think as Stephane did come on in his prepared remarks, I think we are very pleased with the progress we made very recently, partly the U.K. CMA authorities and obtained that they have accepted that we go into remedies extension of Phase I through remedies as it has been commented and they have accepted remedies. So now to work through these remedies and implement them as soon as and effectively we can. And that's the reason why we have increased our confidence to conclude at the end of the quarter or early next quarter. Now the other outstanding, I think Norway is known to be outstanding. And I think we have been engaging very effectively in the last few days and few weeks with the Norwegian authority and I believe as well that I think we are, as we commented, going to hopefully a resolution there. So that's the reason why we maintain our confidence into the end of this quarter or early next quarter.

Yes. And then Olivier, I would love you to share your thoughts on the macro, particularly from the supply side. You spent a lot of all around the world, where do you expect activity if we're in a lower commodity price environment to be dialed back? What do you think is relatively price inelastic? Is there a price level at which point you see activity particularly cut back? Just your perspective on the near-term macro. And then also your perspective on the long-term macro because you've had an underinvestment view that ultimately, long term, that's going to catch up here. Does this just reinforce that?

Yes. I think starting with the long term, maybe it's easier. I believe that the position of oil and gas to feed the energy mix of the world and progress and driven by different demand, be the global South, be the AI or be the electrification, I think, will continue to pull for the long term. And this, combined with the natural decline that is pressing on many basins, as you've seen, will continue to call for replenishment and maintaining, if not increasing level of investment that we see today. So long term, the view is intact. And I think the role of offshore to address this, the role of the commitment of execution to capacity expansion in Middle East, the role of gas, partly through security of gas supply in Asia and the development of unconventional internationally to address this, I think will continue to be the area of growth that we foresee long term to remain, and I'm not talking about digital here. Now in short term, I think it's very difficult to gauge. But I think generally speaking, the short-cycle activity will be the first exposed and Americas has quite a few area of short cycle starting with the U.S. land. And I think this will be the first that certainly will have the most impact. Internationally, I think the resilience, as we mentioned, of Middle East, many countries are committed here, relatively independent of oil price for their capacity expansion and be it UAE, be it Kuwait and activity in some other part of the country around Middle East will continue to stay and/or if not accelerate. Asia, driven by energy security. We also have resilience and even by deepwater activity there, offshore deepwater activity there that is strong and not talking about China that is holding the activity because they base it on a 5-year plan, not necessarily on oil price of today. So you combine all this, you still have quite a few exciting pockets of growth geographically. And you have some secular trend digital. You have increased production recovery and you have uncommercial internationally that will continue to be an area of growth. So yes, there are opportunity to capture and there are ways to offset the decline of the short-term decline we expect into the total CapEx spend.

Your next question comes from the line of Roger Read with Wells Fargo.

Maybe if we could, Olivier, just you were mentioning deepwater there. We certainly -- well, it didn't sound like exploration was an uplift for you in Q1. We've certainly seen the industry start to lean into exploration a little more. And I was just wondering if you could kind of take us around the world a bit on where we are seeing things pick up. I mean, West Africa has looked good. Certainly, Latin America ex Mexico has continued to look pretty good in South America. And then I was just curious, anything else on that front.

Yes. I think the reserve replacement ratio is still what drives the IOCs and many large independents and some critical NOCs to continue to explore. And we have seen a rebound in commitment to exploration in the last 18 months that I don't see changing directionally, although there will be some discretion taken by some customers, and we have to go one customer at a time to review this. But directionally, I think the need for replacing reserve for majors and the need for developing long-term oil or long-term gas play in Asia or in the offshore basins at large, I think, remains intact. And I think you are seeing it translating to FID that we expect to be piling up in '26, '27 that will impact Subsea business going forward. But yes, exploration is not over. And exploration takes 2 forms -- exploration, I think, 3 forms, I would say. One is the near-field exploration in mature basin, Gulf of Mexico or even Brazil or the North Sea, including the Norwegian sector. And then you have the frontier basin, be it Namibia, be it Suriname, be it part of Asia, Indonesia, particularly that are seeing new fresh exploration investment. And finally, you have the other way to explore, which is digital exploration. And I think this is what we are benefiting from as well, a lot of reprocessing, a lot of activity for data processing. And hence, we are exposed to those. So yes, I think that the exploration will remain healthy, but this year may suffer from discretionary decision and from some lingering white space, as we call it in deepwater.

Appreciate that. The other question I had just because it was called out as part of this quarter, things softer in Russia. Ironically, there was an article in the press today implying that Russia activity was at a multiyear high in the first quarter. So a bit of a juxtaposition there. Just if you could give us any more insights on what you're seeing there?

I think I will restrict the comments on Russia because we have taken this position to implement sanction and critical control of our activity there. And this is what has led to a deep decline in Russia, and we expect this to continue as we continue to restrain and take every measure to sanction technology access and technical support to our team.

Your next question comes from the line of Stephen Gengaro with Stifel.

I was wondering, as you talked about the outlook, and I was sort of focused on the production segment here, can you talk a little bit about your views on the resiliency of that business versus other parts of the company and maybe even the margin stability or contribution to margin expansion you see coming from that segment as we go through the year?

I mean I will not comment directionally on the margin. I think we don't provide guidance on margins on our divisions. However, I think the strength of the production system division, I think, stems from the adoption of this technology and the success we have in market position across the globe, both internationally and North America. There has been a growing market in North America, U.S. land particularly lately. So I think we have a market share, market gain, market position due to technology. We have feed technology. We have a unique electrical completion technology. We have -- we are unlocking some efficiency in performance on a lift. And we have some success in Subsea, partly in processing that is in combination, giving us this traction into this market. So that's the first. The secondly, I think, as you said, we expect that the long cycle side of this production system will be more resilient against this market uncertainty as we see it. And some of the short cycle, it's all about performance. If we maintain our performance as we have in the U.S. land market, I think we'll maintain our market position or go against the tide and be able to grow in those markets. So I feel confident about the ability of the production system to continue to grow this year and continue to gain market position or to leverage the long-cycle exposure partly deepwater for success. So I feel confident, but I will not comment on the margin. We are confident that the team is executing very well and has -- will contribute to protecting our margin and contribute to margin expansion going forward.

Great. And then the second question I had was around your confidence in free cash generation for the year. I mean you're obviously committed to returning a significant amount of cash. How do we think about you sort of stress testing that against the uncertain macro and sort of preservation of cash and balance sheet versus returning capital? Like is there a stage at which you slow that down or your confidence is pretty high?

So first, thanks for the question, Stephen. So we did start the year on cash flow as we expected, even a bit better, as I mentioned, and we are still quite confident that it will follow the pattern we usually see every year, and it will increase significantly in the following quarters. And the second half is really when we make the majority of the free cash flow for the year. So yes, you're absolutely right. We do stress testing. H2 is uncertain, as we said, in a lower activity scenario, which is not the best case today, but in case commodity pricing drop further, we would actually expect headwinds on earnings to be partially offset by lower working cap requirements that would provide quite a buffer. So in many cases, we believe actually our free cash flow for the year will continue clearly to support our commitment of minimum $4 billion returns to shareholders. So we are confident on our cash flow, and we are confident that clearly, this commitment is not going to change.

Your next question comes from the line of Keith MacKey with RBC Capital Markets.

Just wanted to start out maybe on the margins now. Olivier, without commenting on segment margins specifically, certainly, we did see Production Systems and Digital up nicely year-over-year, which seem to support the business very well. But can you just comment on the strategy from here relative to what you're seeing in the cycle in terms of where ultimately the business goes relative to what we're seeing as the cycle being a later cycle in the general oil and gas market? And just how you think that all plays out with the different segments and being a more cross E&P life cycle business?

Yes. I believe the strategy we have, first and foremost, to continue to, I think, leverage the market position we have, the adjusted strategy we had in the [indiscernible], as I mentioned, I think is fit for this market condition going forward. We believe that our exposure internationally, very diverse broad exposure, both onshore, offshore and gas exposure, including unconventional digital and production, as you mentioned, I think we continue to support and production is -- I will call it production recovery, and I think that includes element of our Reservoir Performance division as well as our Production System division. I think is -- will have resilience going forward. The drilling, as you have seen, I think, is more directly linked to the rig activity that I think in this uncertain environment has and will continue to be getting downward pressure. But I think from -- as we commented earlier from the margin, we will continue to anticipate, take cost action and continue to extract efficiency from our organization to partially offset this and continue to focus on maintaining our margins. So we believe that, as we said, the mission remain intact to protect our margins with all the commentary and provision of oil price and tariff. I think our mission remains intact that in this mix, we believe that digital growth and the growing success we have in production system and containing the margin pressure on the Reservoir Performance and Well Construction will result into maintaining and protecting our margin as much as we can, excluding tariff as we commented.

Yes. I appreciate the comments there. Maybe just one more on tariffs. I know the situation is certainly incredibly fluid. But does the guidance that you've provided imply continuation of existing tariffs that are on? Or can you help us think about those pieces a little bit more?

For the second quarter, absolutely, I think it's assuming current tariff unchanged. That 50 to 100 basis points margin expansion sequentially includes the current tariff framework. And again, for the second half, it will depend on the final tariff framework, which we all know will change in one way or another. So it will -- the margin expansion will fluctuate based on that.

Your last question comes from the line of Dan Kutz with Morgan Stanley.

So I was maybe hoping we could dig in a little bit deeper on new energy across your kind of 5 pillars. And I guess the -- I don't know if you want to call it the sixth pillar with the data center infrastructure. But I think you guys have done a great job of quantifying the opportunities around data center infrastructure and kind of get the sense that among the 5 other pillars, CCUS is maybe the largest. But as you think about your $3 billion 2030 new energy revenue target, how do you think about the contributions across those 5 pillars, where do you see kind of the more or less growth potential, more or less contribution? Any color you can share there would be great .

Yes. We are not ready to -- we are not here to comment necessarily as an update on our $3 billion ambition for new energy. But indeed, I think CCS all in, as I call it, okay, both the sequestration and all the services, including digital that we have there will be a large component of that, okay, clearly. Geothermal has quite a good momentum. And I think it's too soon to say whether the unconventional or next-generation geothermal is being pursued both in Europe and in the U.S. with the support of the authority everywhere, I think will unlock and give us the second leg of growth, clearly, too early to say. The lithium, as I commented, I think, is a smaller opportunity, but I think it's quite exciting, and we are getting a lot of inbound requests to use the pilot and to test against the critical mineral ambition that many of our prospect customers have, be it a mining company or be it a few companies that are for oil and gas that are stepping into that business. Hydrogen is more a next decade ambition that we have and the same for energy storage, I would say. And data center, I think the ambition we have is continue to consolidate and leverage the success we have with this engagement we have developed and success growth that we have developed and expand towards low-carbon solutions that are in need for decarbonizing the power source of this data center as well as providing effective cooling and support some manufacturing capacity to deploy and deliver these data centers. We will have -- at the end of this year, they supported more than 15 data center solutions across the U.S. So that's quite something we are proud of. So again, you can see all of this as a sum of business that will grow at a higher rate than the oil and gas sector for the years to come. Hence, it is again adding to the to the resilience and to the ability we have to navigate a difficult time as we have today and keep extracting growth or resilience across this.

Awesome. That's all really helpful. And then maybe a quick one just on the APS on the Asset Performance Solutions business. I'm sure the highest priority is kind of getting the Palliser deal across the finish line. But how do you think about the remainder of that portfolio? My understanding is it's the Ecuador asset, which is kind of fairly oil levered is the biggest remaining or perhaps only remaining component. Is that something that you guys could potentially be divesting at some point in the future? Or is that an asset that you're planning on keeping? Just wondering how you think about the APS portfolio moving forward following the Palliser transaction?

Yes. So indeed, following Palliser, we'll only be left with Ecuador, and it will remain that way. And in Ecuador, we have 3 projects. And as we explained in the past, these projects are quite different from equity positions such as we have in Canada. They are more like service contracts with the local NOC, with the operator. So you are actually closer to our core business here. The only difference, if I may say, is that we are paid in production equivalent through a barrel instead of an invoice for services. So at this stage, we -- it's quite economic. These projects are providing a lot of cash flow for the company. They are providing good profitability. So considering the nature of the projects, they are likely to stay at least for -- they have a finite contractual term actually, which we can negotiate and extend with our customer. But at this moment, for the next few years, you have to assume they will stay within our portfolio.

So ladies and gentlemen, as we conclude today's call, I would like to leave you with the following takeaways. First, while the market outlook remains uncertain, SLB is positioned to demonstrate resilience through our strategy, leveraging our global reach, innovation capabilities, differentiated digital offering, diversification beyond oil and gas and disciplined cost management. Second, we are confident in our ability to continue generating strong cash flows despite the evolving market dynamics, and we remain focused on protecting margins and committed to increase return to shareholders in 2025. And finally, we look forward to creating value for our customers, partners and shareholders in the coming quarters. With this, I will conclude today's call. Thank you all for joining.

This concludes today's conference call. You may now disconnect.