SLB Limited Common Shares

Ladies and gentlemen, thank you for standing by, and welcome to the Schlumberger earnings call. At this time, all participants are in a listen-only mode. Later, there will be an opportunity for your questions. If you would like to ask a question, please press 1, then 0 on your touchtone phone. Please be aware that you will not hear a tone acknowledging your request. You may remove yourself from queue at any time by pressing 1, 0 again. You will hear a tone when you remove yourself from queue. As a reminder, this call is being recorded. I would now like to turn the conference over to Simon Ferrant, Vice President, Investor Relations. Please go ahead.

Good morning, good afternoon, good evening, and welcome to the Schlumberger Limited fourth quarter and full year 2019 earnings call. Today's call is being hosted from Houston following the Schlumberger Limited board meeting held here this week. Joining us on the call are Olivier Lepouche, Chief Executive Officer, Simon Eyre, Chief Financial Officer, and Stephan Biguet, VP Finance. For today's agenda, Olivier will start the call with his perspectives on the quarter and our updated view of the industry macro. After which, Simon Eyre will give us more details on our financial results. Then we'll open up to your questions. As always, before we begin, I'd like to remind the participants that some of the statements we'll be making today are forward-looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. I therefore refer you to our latest 10-K filing and other SEC filings. Our comments today may also include non-GAAP financial measures. Additional details and reconciliation to the most directly comparable GAAP financial measures can be found in our fourth quarter press release, which is on our website. Now, I'll hand the call over to Olivier.

Thank you, Simon, and good morning, ladies and gentlemen. I'm going to comment on four topics this morning. First, our fourth quarter performance and our expectations for the first quarter. Second, our view of the industry macro conditions Third, the 2020 outlook and our goals for the year. And last, an update on our strategy for North America. Before that, however, I would like to say how proud I am of the Schumerger team's performance throughout 2019. The progress we made in operational execution in a challenging year has been outstanding. During the last six months, we set new benchmarks for safety and much improved our service quality performance. Execution matters greatly to our customers and is the foundation of our performance vision. I feel privileged to lead such a high-performing team. Last quarter performance highlighted the value of our international franchise, where activity was very encouraging. For the first time since 2014, international margins improved sequentially from the third to the fourth quarter. This led to 100 BPS margins expansion, from H1 to H2 2019. Several factors drove our international financial performance. Year-end product sales reached one of the highest levels since 2014. We made early progress in reversing underperforming business units across several job markets. Finally, we saw favorable technology mix on offshore exploration and digital, benefiting reservoir characterization at large and Warline and SIS in particular both of which had one of their best quarters since 2014. In North America, our team managed proactively the sharp decline in land activity and pricing headwinds during the quarter, while concurrently launching and starting to execute our North America land strategy. I will elaborate on this in a moment. Fourth quarter free cash flow was also very strong, building on resilient cash flow from operations and further progress in the company's working capital efficiency. This, combined with the proceeds from two business transactions, enabled us to reduce net debt by $1.3 billion during the quarter. Overall, the fourth quarter was very solid internationally, with expanded margins and resilience in North America despite the severe drop in activity and weaker pricing. Taken together, this resulted into year-over-year growth in both EPS and cash flow generation. As we transition to the first quarter, most business lines and geography will experience the usual seasonal decline. However, following strong year-end sales and the limited impact of winter disruptions during the fourth quarter, we anticipate the international and carbon business to record high single-digit sequential decline in revenue a seasonal impact marginally higher than in recent years. Also, we anticipate a low single-digit sequential decline in North America, primarily related to the execution of our Nile strategy and the seasonal offshore impact. In addition, the recent and persistent market disruption linked to geopolitical risk or civil unrest continue to affect our international operations and represent a financial exposure during the first quarter. In particular, our activity in Iraq has been visibly reduced due to security risks similar to our reduced activity in Libya. Also, Argentina's activity remains muted due to the difficult investment climate. Looking now at the macro, the recent easing of the US-China trade conflict has reduced uncertainty on the economic outlook. And the latest IEA forecast for oil demand indicates growth of 1.2 million BPD in 2020, slightly higher than in 2019. U.S. production growth, however, should slow significantly in 2020 and come well short of last year's growth due to heightened capital discipline and the resulting drop in activity. Over time, this will create a pull on the OPEC Plus and international non-OPEC production base. These macro conditions will continue to support the international growth cycle. This will also increasingly stimulate the investment to renew activity in offshore and deepwater exploration development as the year progresses. Moving now to the outlook for 2020. We anticipate international EMP capex planning to grow in the mid-single-digit range. In contrast, we expect a second year of market contraction in the North American lands with a decline in the high single-digit to double-digit range. This aligns with the strength of our international franchise and makes the execution of our NAL strategy even more critical to protecting our returns from any further activity downside. With this market outlook, our ambition would be to grow internationally above mid-single-digit, excluding the impact of recent divestiture Revert carbon group to growth on the back of long-cycle booking execution and contain North America to high single-digit decline as a consequence of both market conditions and strategy execution. Within this market, the impact of our capital stewardship strategy, particularly the reduction of underperforming business units, will be material. At the same time, the impact of our transformation program should continue to enhance the incremental margin performance and cash flow for most of the service product lines. We are confident that the shape and mix of international activity growth will support favorable revenue quality during the next four quarters with contributions from new technology adoptions, stronger offshore activity and digital transformation. Offshore activity will increasingly grow towards deepwater basins in later parts of 2020 reflecting the acceleration in investment by IOC and large independents. Therefore, we expect international margins to further expand in 2020, building on the momentum from second half of 2019. In addition, and as an outcome of the NAL strategy execution, we also expect North America margins to expand, despite the headwinds on activity and revenue contraction. This will be the first year since 2013 with such an improvement in financial performance across international and North American markets. This aligns closely with our strategy focused on returns, both in margin and cash generation. I now have some comments on the Nile strategy content and execution to support our margin expansion in North America despite the expected double-digit market contraction in 2020. In September, part of our new performance strategy introduction included a specific scale to fit and technology access approach to restore North America to double digit margins by prioritizing returns over growth. For the most part, we have completed a review of our current business portfolio performance. We have mapped the outlook scenario and the anticipated market trends and documented all available options, both organic and inorganic. to achieve a step change in returns and an asset-light portfolio transformation. Although this is still ongoing, we are ready to share key aspects of this strategy today. First, and to address one theme, the largest element of our North America portfolio, we have decided to repurpose the business across three hubs to decentralize the support structure around the largest basins. will further align our organization and capability with our key customers and maximize the positive impact of technology and integration. This has resulted into a net reduction of 30% of deployed FRAC flip capacity and impacted visibly our fourth quarter sequential decline. This will represent the new self-imposed capacity cap compared to the levels of the third quarter of 2019, or a 50% reduction when compared with our total available capacity. The greater alignment with key customer and major basins will also increase the number of dedicated FRAC fleets to more than 80% of total, leading to a much reduced spot market exposure. While we believe this action improves one's steam performance, reshaping it for the better into a focused and profitable business line will keep our options open and be ready to participate into an enhanced market consolidation offering given the right partner and economics. Second, we will seize onshore cultivating operations in North America, a market that we believe is commoditized and offers neither a significant integration nor performance technology upside. Third, we are pursuing opportunity for the future of our road lift business line in North America. We believe that this portfolio is best served through regional players that can further leverage the distribution network and better align with the equipment market. We'll continue to develop the business, support our people, and serve our customers until we find the right opportunity. Finally, we'll continue to accelerate our Feed for Basin strategy, where we selectively franchise our technology access through a network of local, basin-specific partners. This was demonstrated with success by drilling and measurement in 2019. We'll expand this asset light model to our business line to increase our market reach while optimizing our infrastructure and CAPEX requirements. In support of this decision, we'll continue to rationalize our facility footprint with an estimated 25% reduction in operating location before the end of 2020 and adjust the support structure accordingly. we have already reduced our workforce by more than 1,400 employees since Q3 2019. The action related to the strategy execution, when completed, will generate savings in excess of $300 million on an annualized basis when compared to the Q3 2019 run rate. Our ambition for North American land in 2020 has been clearly set for margin expansion despite the unfavorable activity outlook. While our strategic decisions will result in revenue reduction greater than the decline of the market, they will contribute incremental earnings and cash flow compared to 2019. This will allow further prioritization of resources and capex allocation towards the international market. I hope that my comment this morning offered you more color on our fourth quarter performance, as well as fresh guidance for our first quarter and full year ambition, while also providing you with insights on our strategy for North America land. Now, before I hand over to Simon Hayat, I would like to recognize the contribution he has made over more than 37 years of his career with Schlumberger, and more than 13 years leading the finance function of this company. Simon steps down next week, but will continue as a senior strategic advisor to me. I'm also very pleased to welcome Stéphane Biguet to the CFO Hall I fully trust his experience and functional expertise. With this, I turn it over to Simon.