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spk05: Ladies and gentlemen, thank you for standing by. Welcome to the Schlumberger Earnings Conference Call. At this time, all participant lines are in a listen-only mode. Later, there will be an opportunity for your questions. Instructions will be given at that time. If you should require assistance, please press star, then zero, and we will assist you offline. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to N.D. Maduamazia, the Vice President of Investor Relations. Please go ahead.
spk07: Thank you, Leah. Good morning, and welcome to the Schlumberger Limited fourth quarter and full year 2021 earnings conference call. Today's call has been hosted from Houston, following the Schlumberger Limited board meeting held earlier this week. Joining us on the call are Olivier Lepuche, Chief Executive Officer, and Stéphane Biguet, Chief Financial Officer. Before we begin, I would like to remind all 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 our other SEC filings. Our comments today may also include non-GAAP financial measures. Additional details and reconciliation to the most directly comparable GAAP financial measures can be found in our fourth quarter press release, which is on our website. With that, I'll turn the call over to Olivier. Thank you, Andy.
spk09: Ladies and gentlemen, thank you for joining us on the call today. In my prepared remarks, I will cover our Q4 results and full year 2021 achievements. Thereafter, I will follow with our view of the 2022 outlook and some insight into our near-term financial ambitions. Stéphane will then give more detail on our financial results, and we will open for your questions. The fourth quarter was characterized by broad-based activity growth, with continued momentum in North America, activity acceleration in international markets, and an accretive offshore market contribution, upon which we delivered strong sequential revenue growth, our sixth consecutive quarter of margin expansion, an outstanding double-digit free cash flow generation. These financial results conclude an exceptional year of financial and performance for Chouin-Merger, at a pivotal time for the company and in our industry at large. Underlying these results are the following highlights from the quarter. Geographically, sequential growth in North America exceeded reactivity, growing in excess of 20% offshore, and international revenue growth accelerated closing the second half of 2021 up 12% versus the prior year. All international areas posted growth driven by gains in more than 75% of our international business units. By division, revenue in all four divisions grew sequentially and went compared to the same period last year. Digital integration led growth, posting double-digit sequential growth and record high margins. Well-construction and reservoir performance are predominantly service-oriented divisions, outperform expectations with strong sequential growth and approximately 30% growth year-over-year on a pro-forma basis. Production systems recorded year-end sales, which drove mid-single-digit growth, though partially impacted by logistics change. Operating margins expanded in spite of seasonality effects, improving further beyond pre-pandemic And finally, we generated outstanding cash flow from operations, exceeding $1.9 billion in the quarter. All in all, I am very pleased with our operational execution, our safety performance, and our financial results through the fourth quarter. Now, let me briefly reflect on what we achieved in 2021. In our core, we fully operationalized our returns-focused strategy, leveraging our new division and baseline organization, to seize the start of the upcycle. In North America, this resulted in full-year top-line revenue growth, excluding the effects of divestiture, and significantly expanded margins, achieving double digits, one of the financial targets we laid out in 2019. Internationally, we also grew the top-line and expanded margins significantly as international activity strengthened in the second half of the year. This also resulted in full-year international margins, that exceeded 2019 levels. Taken together, these margins result in the highest global operating margins of the last six years, setting an excellent foundation for further expansion as activity accelerates and market conditions further support pricing improvement. In digital, our second engine of growth, I am very proud of the momentum it established during the year. We advance on our goals to expand market access and accelerate adoption of our platform, AI capabilities, and powerful digital tools to reduce cycle time, improve performance, and lower carbon intensity. We built partnerships to achieve comprehensive cloud access globally, collaborated with AI innovators to deploy machine learning and AI solutions, and enabled digital operations through the automation of key workflows in well construction and production operations. At the end of 2021, we have more than 240 commercial Delphi customers, recorded more than 160% Delphi user growth year over year, and so a more than tenfold increase in compute cycle intensity on our Delphi cloud platform. We also made significant progress in our data, business stream, and digital operation, advancing our OSDU commercial offerings, autonomous draining, and the adoption of Agora Edge, AI, and IoT solutions with great success. The Q4 results, including significant uptake in digital sales and sizable incremental margin, are a clear testament of this success. In Schumerger New Energy, we continue to advance the development of clean energy technologies and low-carbon projects. In 2021, we took a position in stationary energy storage, expanding our total addressable market, and advanced all of our ventures in hydrogen, lithium, geoenergy, and a suite of CCUS opportunities, including our bioenergy CCS project. Some notable milestones achieved include the signature of pilot agreements with Genvia, our hydrogen venture with Acerlor, Mittal, Uzitech, Vika, and Hanamix, leading company in steel and cement. And in Celsius, our geoenergy venture, we secured five commercial contracts in Europe and won in North America for a prestigious university campus. This was also a pivotal year for us in terms of our commitment to sustainability. We announced a comprehensive 2050 net zero commitment inclusive of scope 3 emissions and launched a transition technology portfolio to focus on decarbonisation of oil and gas operations with much success. Schlumberger earned a AA rating by MSCI and won an ESG Top Performer Award by Hart Energy, recognizing our sustainability efforts, our enhanced disclosure, and our commitment to apply our technology and capabilities towards helping the world meet future energy demand. In summary, 2021 was a great year for Schlumberger. Beyond its operational and financial results and ESG accomplishments, we made excellent progress in our core digital and new energy, the three engines of growth that support our success now and well into the future. Above all, I'm most proud of our people, their unique ability to execute, remobilizing operations across the world through numerous pandemic constraints, adapting the logistics and supply chain dynamics, and setting new performance benchmarks, all of which earn the recognition of our customers. I would like to thank the entire team for delivering a year of our performance on every metric. They surpassed all of our targets this year and created excellent momentum as we entered 2022, for which I would like now to share our outlook. Looking ahead, we have increased confidence in our view of robust multi-year market growth. Tight oil supply and demand growth beyond the pre-pandemic peak are projected to result in a substantial step up in capital spending amid shrinking spare capacity declining inventory balance and support the whole price. In addition, we expect more pervasive service pricing improvements in response to market conditions as technology adoption increases while service capacity tightens. In essence, 2022 will be a period of stronger short-circle activity resurgence driven by improved visibility in the demand recovery and greater confidence in the whole price environment. And as all demand exceeds Pre-pandemic levels in 2023 and beyond, long cycle development will augment capital spending growth in response to the call on supply. This demand-led capital spending growth sets the foundation for a strong multi-year up cycle. Indeed, this scenario has already been established. As the number of FID increases, service pricing has begun to improve and multi-year long cycle capacity expansion plans have started, particularly internationally. and offshore as seen during the last quarter. Turning to 2022 more specifically, we expect an increase in capital spending of at least 20% in North America, impacting both the offshore and offshore markets. While internationally, capital spending is projected to increase in the low to mid teens, building momentum from a very strong exit in the second half of 2021. All areas and operating environments, short and long cycle, including deep water, are expected to post strong growth, with upside potential as Omicron disruptions dissipate as the year advances. In this scenario, increased activity and pricing will drive simultaneous double-digit growth both internationally and in North America that will lead our overall 2022 revenue growth to reach mid-teens. Our ambition is to once again expand operating and EBITDA margins on a full-year basis, Exiting the year of EBITDA margins at least 200 BPS higher than the fourth quarter of 2021. In this context, let me show how we see the year unfolding. Directionally, while we are still experiencing COVID-related disruptions, we anticipate typical seasonality in the first quarter with revenue and margin progression similar to historical sequential trends, which will be seen most prominently in digital integration. will be followed by a strong seasonal uptick in the second quarter across all divisions, with growth further strengthening through the second half of the year, supporting our full-year mid-teens revenue growth ambition and EBITDA margin expansion. This growth and margin expansion trajectory gives us further confidence that we will reach or exceed our mid-second ambition of 25% adjusted EBITDA margin before the end of 2023, leading to adjusted EBITDA that should visibly exceed 2019 levels in dollar terms. With this, I will now turn the call over to Stéphane.
spk08: Thank you, Olivier, and good morning, ladies and gentlemen. Fourth quarter earnings per share, excluding charges and credit, was $0.41. This represents an increase of $0.05 compared to the third quarter of this year and of $0.19 when compared to the same period of last year. In addition, we recorded a net credit of $0.01, bringing gap EPS to $0.42. This consisted of a $0.02 gain relating to the sale of a portion of our shares in Liberty Oilfield Services, offset by a $0.01 loss relating to the early repayment of $1 billion of notes. Overall, our fourth quarter revenue of $6.2 billion increased 6% sequentially. All divisions posted sequential growth led by digital and integration. From a geographical perspective, international revenue grew 5%, while North America grew 13%. Pre-tax operating margins improved 31 basis points sequentially to 15.8%, and have increased for six quarters in a row. This sequential margin improvement was driven by very strong digital sales, which helped sustain overall margin despite seasonality effects in the northern hemisphere. Company-wide EBITDA margin remained strong at 22.2%, which was essentially flat sequentially. Let me now go through the fourth quarter results for each division. Fourth quarter digital and integration revenue of $889 million increased 10% sequentially. with margins growing by 268 basis points to 37.7%. These increases were driven by significantly higher digital and exploration data licensing sales, which were partly offset by the effects of the pipeline disruption in Ecuador that impacted our APS projects. Reservoir performance growth further accelerated in the fourth quarter, with revenue increasing 8% sequentially to 1.3 billion. This growth was primarily due to higher intervention and stimulation activity in the international offshore markets. Margins were essentially flat at 15.5% as a result of seasonality effects and technology mix, largely driven by the end of summer exploration campaigns in the Northern Hemisphere. While construction, revenue of $2.4 billion increased 5% sequentially due to higher land and offshore drilling, both in North America and internationally. Margins of 15.4% were essentially flat sequentially as the favorable competition of increased activity and pricing gains was offset by seasonal effects. Finally, production systems revenue of 1.8 billion was up 5% sequentially, largely from new offshore projects and year-end sales. However, margins decreased 85 basis points to 9%, largely as a result of the impact of delayed deliveries due to global supply and logistic constraints. Now turning to our liquidity. Our cash flow generation during the fourth quarter was outstanding. We delivered 1.9 billion of cash flow from operations and free cash flow of 1.3 billion during the quarter. This was the result of a very strong working capital performance driven by exceptional cash collections and customer advances. Cash flows were further enhanced by the sale of a portion of our shares in Liberty generating net proceeds of 109 million during the quarter. Following this transaction, we hold a 31% interest in Liberty. On a full year basis, we generated 4.7 billion of cash flow from operations and 3 billion of free cash flow. We generated more free cash in 2021 than in 2019, despite our revenue being 30% lower. This is largely attributable to our efforts of the last two years relating to the implementation of our capital stewardship program and the high grading of our portfolio. As a result of all of this, we ended the year with net debt of $11.1 billion. This represents an improvement of $2.8 billion compared to the end of 2020. We are proud to say that net debt is now at its lowest level of the last five years. During the year, we also continue to reduce gross debt by repaying $1 billion of notes that were coming due in May of this year. In total, our gross debt reduced by $2.7 billion in the last 12 months, thereby significantly increasing our financial flexibility. Now, looking ahead to 2022, we expect total capital investments consisting of CapEx and investments in APS and exploration data to be approximately $1.9 to $2 billion, as compared to just under $1.7 billion in 2021. This increase will allow us to fully seize the multi-year growth opportunity ahead of us, while still achieving our double-digit free cash flow margin objective. We are entering this growth cycle with a business that is much less capital intensive as compared to previous cycles. As a reminder, during the last growth cycle of 2009 to 2014, our total capital investment as a percentage of revenue was approximately 12%. We are therefore well positioned to fully reap the benefits of this growth cycle with the potential for enhanced free cash flow margins and return on capital employed. With this backdrop, I would like to emphasize that based on the industry fundamentals of and positioning of the company that Olivier highlighted earlier, our financial outlook for 2022 is very strong. We have high expectations, and in 2022, we expect a triple-double consisting of double-digit return on capital employed, double-digit return on sales, and double-digit free cash flow margins. It is worth noting that we have not experienced this combination in a single year since 2015. Finally, I am pleased to announce that we will hold the Capital Markets Day in the second half of the year. This event will allow us the opportunity to provide you with additional details relating to Schlumberger's strategy and financial objectives. Further information regarding this event will be forthcoming shortly. I will now turn the conference call back to Olivier.
spk09: Thank you, Stéphane. So I believe that we are ready to turn the call to you for the questions. Thank you.
spk05: Thank you. Ladies and gentlemen, if you would like to ask a question, please press 1 then 0 on your telephone keypad. You will hear acknowledgment that your line has been placed in queue. You may remove yourself by pressing 1 then 0 again. One moment, please, for the first question. And our first question is from James West with Evercore ISI. Please go ahead.
spk06: Hey, good morning, Olivier.
spk09: Good morning, James.
spk06: So, Olivier, I like your increased confidence in achieving mid-cycle margins sooner rather than later. And I wanted to dig in a bit on why that confidence is has increased obviously, we're starting at a bit higher level, but the target is a pretty solid target. And I'm curious, what are the key drivers around that confidence increase?
spk09: No, thank you, James. Let me explain why we have increased confidence. And I think some part of the answer on this question is in the quality of the results we have delivered in 2021 as a foundation. And next, I believe that the current market condition are clearly supporting our thesis for the budget CAGR growth over a few years. So in this backdrop, I think we have, we believe, three or four factors that will help us continue to guide upwards our margin expansion. Firstly, I would say the foundation. The foundation we have put in place in the last 18 months, the operating leverage reset the integration, performance, execution, and the portfolio are here to stay. And this was already very visibly impacting the service-oriented division, well construction, and the level of performance as you have seen throughout the year, and partly the second half of last year. And we saw where they surpassed already the 2018 margins performance. Secondly, I think the market mix. The market mix is set to improve and resonate to our portfolio strength. Increased offshore activity mix has already started to happen, and we expect this to only accelerate as the year unfolds and further into 2022. The adoption of technology also is accelerating, as you have seen, including digital, but our fit for basin, our transition technology, And all the technologies that extract performance for our operations are making an impact today and are getting further adoption by our customers and giving us a premium. And finally, pricing. Well, a year ago, we were talking about green-shot pricing in North America. Today, we are seeing and we are already recording signs of pricing improvements on a broad market condition, both in North America and also internationally. when we are getting awarded new contract, as well as when we have to mobilize and deliver unique technology to our customer. So as the year developed, we believe that these attributes, our foundation, operating leverage, our performance, that differentiate and execution give us a premium, our market mix, our technology adoption, success with customer, and finally pricing, giving a tailwind to this, will drive and further expand our margin the 25% margin expansion. So it's not about if, but it's about when. And we have gained confidence and we have moved forward our confidence into the 2023.
spk06: Okay, great. That's very clear, Olivier. Maybe a second question for me. As we think about this cycle is really starting to take hold here, how should we think about the cadence of of growth you've given obviously numbers for 2022 but if we think about it by both geography and by division um where do you see the i guess the the the biggest growth uh where where could there be some lagging areas uh i'd like just a little more color on that cadence would be very very helpful maybe in one one world the market will be growth will be very broad
spk09: across all geographies, across all religions, first as a backdrop. I think that's what we are realizing, and that's quite unique. But I think if I had to characterize first geographically or very high level, I think it's possibly a tale of two halves, with North America leading the uptick of activity growth in the first half, international further accelerating in the second half, where we did end on the H2 over H2 of 12%. We expect this to be the base, in the first half and accelerate further in the second half internationally so that we are even accelerating into 2023 for international activity. Secondly, I believe that if we have to characterize what will lead and be attractive to growth, I would say America's land because of the activity optic, but I will also put offshore environment and Middle East. These are the three engine of growth that we pull this year growth to the target ambition we have put up mid-teams. So now, per division, I think the service-oriented division of Reservoir Performance and Well Construction will be accretive to this, we expect, followed by, because they are benefiting from the social environment, they are benefiting from the pricing, and they have strong both NAM and international presence. So they are benefiting from long cycle exposure and technology mix favorable. In addition, the pollution system will also see growth building on the short cycle exposure to North America and the backlog of contracts that were won in the last few quarters that will execute towards 2022. Funding on digital integration, it's a two-phase of a division here. We expect the digital to be accretive to our growth while it will be moderated by or visibly moderated by a flat fish environment for APS production going forward. So that gives you the mix across the division and across the geographies.
spk06: That's perfect. Thanks, Olivier. You're welcome.
spk05: Our next question is from David Anderson with Barclays. Please go ahead.
spk01: Hi, good morning, Olivier. So you laid out the margin expansion and kind of how you're going to see that. I have a question on the other side of that, just thinking about mobilization of large tenders. You start up on the Jafara contract to the Middle East, but I guess typically what we've seen in the past is in these mobilization periods, there's these kind of extra costs that get weighed in. I'm just thinking about how that's looking in 22. I mean, is that something that you think is you're going to have to absorb in 22 and that therefore kind of 23 is sort of another margin uplift there? Or has that improved pricing and some of these contracts kind of countered some of those mobilization? I think you had said something about getting better pricing for mobilization. So if you could just comment.
spk09: Yeah, I think, Dave, I think it's part of the mix of execution that we have. And I think we always mobilize for new products somewhere in the world. And we are committing to international growth and margin expansion this year. The last quarter was already having a witness of significant new project starts, yet we have marginally improved our margins last quarter, and we have seen the results of the core division. So we did it already. As we accelerate deployment, yes, we are very critically assessing the cost of this startup. We are working for customer to minimize. We are using digital operation to remote and optimize our deployment of resource. And we believe that what we have done in the last quarter, we'll continue to do in 2022. So I think directionally, we are still set to improve our margin internationally in 2022, despite and building on this new project. So we are very keen to start all these new projects. We are very proud of the different contract awards that we won last year. And I think this is part of the mix that we're executing. And the more activity and the more growth, we will respond and continue to use efficiency and leverage our operating practice to minimize impact and engage with the customer to get full recognition of our investment.
spk01: Understood. Okay. On the digital integration side, you grew really nice in the top line this quarter. I was just curious, is that related to more new sales of customers or is it more about the adoption pace of your current customers into the workflow? And I was just wondering a second ago if you could just tell us how much that digital portion grew this year. I'm assuming it outgrew the 8% overall top line, but if you could provide any color on that, that'd be really appreciated.
spk09: Yeah, let me give you a little bit of color into this. So first, I think if I had to characterize, I think the uptick we've seen in digital sales at the end of the year is not a pure year-end sales effect on one or two large contracts and one or two application and software sales. It's broad. It's very diverse. It touches and expands upon the platform strategy that develops different revenue streams. So it's about new Delphi Cloud customers. And you have seen, we have announced, we have progressed one more time in the last quarter. It's about new revenue monetization in digital operations, including Agor, including drilling, remote operations, and automation. It's about new data. business stream where we have been securing contract for OSDU foundation, where we are the first to commercialize enterprise data management solution on this OSDU. And it's the follow through on the enterprise contract that we have won in 2021 or in 2020 on Delphi adoption. So it's significant. It relates to the progress we have made in our platform. It relates to the acceleration of digital adoption by our customer and the pursuit of digital transformation by customer. And it translates into an optic in each and every of the digital revenue streams we have created and the success from data to workflow and to operations. So it's diverse, it's broad, and it's multifaceted. So it's here to continue to expand. positive on this because it's not a one-off. Obviously, there is a year-end sales effect there that will not repeat in the first quarter. But at the same time, it's something that I see expanding as a platform going forward. And we are in the early innings of this adoption. As we mentioned a quarter ago, we have 1,700 digital customers. And we are in the early innings of deploying and pursuing this large install base with digital transformation. So it was the first cycle of this digital expansion and digital adoption. I trust this will continue in 2022 and accelerate beyond. Thank you.
spk05: And our next question is from Chase Mulvihill with Bank of America. Please go ahead.
spk11: Hey, good morning, everybody. I'm Chase. So I guess the first question is just kind of around, you know, this looming investment cycle that you and I and hopefully investors are starting to realize needs to happen. And, you know, you had mentioned that you expect a substantial increase in spending, you know, this cycle. So maybe you framed it a little bit, but so could you kind of add a little bit of context about how you see this cycle shaking out? What gives you confidence in it? And then what it means for pricing for OFS. You know, the competitive dynamics have obviously changed, especially, you know, in international where it feels like you've got more discipline, less players. And so just kind of frame the cycle and activity and where you see the most opportunity for growth. And then ultimately what this could mean for pricing this cycle for OFS companies.
spk09: No, thank you. Great, great question. I think the fundamentals, we see them have not changed. And actually, some characteristics of the cycle have accelerated, have been accentuated in the recent months. So the first attribute that we put first is the outlook of economic GDP growth, that considering the oil intensity and energy intensity will steal and will drive the oil demand as a key attribute beyond the previous peak. no later than the end of this year, according to the latest projection, and is set to expand visibly beyond not only in 2023, but in a few years beyond this. So the first is the macro demand situation is set to be favorable for the next few years. Secondly, I think the supply demand imbalance and the supply, I would call, almost crisis that we are facing is prompting not only an uplift onto the community price, but also is prompting the investment, return to investment across the broad portfolio of our customers. So you have seen it in North America, no surprise, but North America is still and will remain structurally smaller than previous cycle due to the capital discipline, but also due to the crunch of supply, including on the service side. Secondly, I think the international underinvestment for the last few years, actually the last down cycle, combined with the dip in the last two years, is creating conditions for a necessary injection of short-cycle capital and then long-cycle capital investment to respond to the supply. So we are seeing growth in North America, albeit a cut. We are seeing a rebound, a visible rebound in short and long cycle investment internationally. And I will insist on the long cycle because I believe that both oil capacity is being looked upon and by some OPEC member to secure future supply market share, but also the international and major are investing into their markets. Advantage offshore basins. And then we are seeing not only infiltrating, but we are seeing FID for offshore that are accelerating going forward. So it's a mix of offshore rebounds, solid, including deep water, international short cycle, and all capacity in land, and finally, solid growth in North America. So these are unique conditions that are tightening the capacity and that are creating the underlying pricing improvement conditions.
spk11: Okay, perfect. Appreciate the color. Um, you know, a follow up to that would be, you know, obviously with this, this, this constructive backdrop for, for summer Jay and, and the OFS industry, you've got a wall of free cashflow coming to you. Um, and so when we look at this, obviously you did 3 billion of free cashflow last year. Um, and you know, it looks like over the next two years, you know, that should be growing. So how should we think about, you know, returning cash, uh, how slumber Jay is going to return cash to shareholders. And then how does M&A fit into this capital allocation strategy? Because obviously you're trying to reshape the company for new energy ventures and things like that as well.
spk08: Thank you, Stephan. Look, I like your expression on free cash flow. It was indeed quite strong last year with $3 billion. Now, indeed, we visibly accelerated the deleveraging of our of our balance sheet, but we are not quite there yet at the leverage ratio we committed to. So we have a clear line of sight now to achieving the target leverage we announced earlier, even though there's still some uncertainty remaining at the start of the year. Nevertheless, with the market fundamentals consolidating, particularly in the second half of the year and into 2023, we have even more confidence indeed now in generating significant excess cash this year and beyond. So we will be able to maintain quite a healthy balance sheet and it will give us the flexibility to increase returns to shareholders as well as fund new growth opportunities. So we will certainly provide a comprehensive framework for future capital allocation as part of the capital market day that we announced earlier. Returns to shareholders are obviously important and increased dividends and buybacks will definitely be part of this equation. As it relates to M&A, sorry, I didn't answer on M&A. It's also part of what we will... It's, of course, part of the toolbox, and you'll get more details when we give you that more comprehensive framework again.
spk11: Okay. I look forward to it. Appreciate the color. I'll turn it back over.
spk08: Thank you.
spk05: Next, we go to the line of Arun Jayaram with JP Morgan. Please go ahead.
spk03: Yeah, good morning. With the marginal supply source now moving from U.S. shale to OPEC, I wanted to see if you could frame what kind of changes in spending patterns are you seeing from the NOCs versus maintenance work versus FIDs and things to increase productive capacity?
spk09: I think what we have seen and we are already witnessing today, I think, and it's visible in Middle East but beyond, is the short cycle, the return of short cycle activity to assure, as you said, the maintenance of production and with a small but visible increment of output supply. What we are seeing is also a commitment and some in the pipeline to increase oil capacity, sustain oil capacity. with a few countries committing to participate fully and laying out the foundation this year and next year into expanding the supply. But what we should not forget about, and it's part very true for Middle East, is there's also a gas market that is being very sustained that has seen reinvestment, and it's part of the regional dynamic And he's already seeing, he's continued to see double-digit growth. So I think it's a combination of gas market being sustained and having had less setback than already in the recent time, short cycle expansion, and long cycle acceleration with new FID capacity. And this is true from... from Deepwater Brazil to the future investment in the current and future investment in the Middle East, or FID that are in the pipeline in Russia. So that's again very broad, and that combines short and long cycle. And if you were to project, I think 2022 is a supply-led activity rebound, and 2023 will be a demand-led rebound. activity growth. And the capacity expansion, the long cycle, will further contribute going forward into 2023.
spk03: Great. And my follow-up is your outlook on 2022 embeds 200 basis points of year-over-year margin expansions in the fourth quarter. So that would If I did my math right, that would put your EBITDA margins, based on the outlook, slightly above 24%. And so I wanted to talk a little bit... Go ahead.
spk09: As we exit, it's an exit rate. We made a comparison 200 BPS or higher as we exit 2022 when compared to the second half or Q4 of 2021. Exactly. Exactly. Okay, got it. So...
spk03: So as we think about 2023, your outlook is that you could, you know, reach or exceed a mid-cycle EBITDA margin of 25%.
spk09: Second half.
spk03: Yeah, in the second half.
spk09: We expect in the second half to reach or exceed, indeed.
spk03: Great, great. And I just wanted to comment on, you know, the drivers of that would be just next and just further pricing improvements.
spk09: I think, again, as I commented in a previous question, I think operating leverage will continue to give us a fall through as we continue to leverage the structural change we have done and digital operation in particular. The mix will be with long cycle and offshore will continue to be digital. part of the technology adoption across the different basins. We will also participate in the mix further. And finally, pricing will expand. So I think this is the combination that gives us more confidence that we'll reach this mid-cycle prior to previous anticipation. Great. Thanks a lot. Thank you.
spk05: Our next question is from Scott Gruber with Citigroup. Please go ahead.
spk12: Yes, good morning. Morning. Morning, morning. So it's clear that your capital density is going to be down versus last cycle. But just given the potential growth rates that we're seeing, coupled with you and peers keeping a lid on CapEx, it appears that the market could be quite tight exiting this year. So my question is, can you keep CapEx at a similar level to 2022 you know, as a percent of sales into 23 and into 24, you know, while still riding the multi-year growth cycle that we all hope unfolds.
spk08: So look, Scott, indeed our capital intensity has reduced quite a bit and quickly just because we high-graded our portfolio, we extracted more operational efficiencies, and we had our capital stewardship program as well where we deploy assets only to the the best returns countries and contracts. So now for 2022, we are looking at spending total capital investments, including APS, between 1.9 and 2. That's just a relatively small increase compared to 2021. Can we keep this into the future? It's a bit too soon to say, but we definitely, whatever increment we make, it's It's geared towards technology. It will be on the most accretive contracts. We want that incremental technology investment to be priced appropriately. And for that matter, we already have a strong pipeline of contracts that allow us to do that at favorable commercial conditions. We'll see how the year progresses, but for the moment, we're quite confident that the envelope we gave you allows us to fully seize the growth in 2022 and prepare for 2023. We will see how we set the envelope in 2023. It cannot be a huge increase for sure.
spk09: But we'll keep the capital intensity of our business going forward in check. I think the capital stewardship part of our returns-focused strategy is clearly giving us a level of a new dynamic. and a new mindset in our commercial and contractual engagement of customer. And we have the whole organization focused on effectively and efficiently using the CapEx, the equipment pool that we have to deploy to the most attractive contract and the most attractive engagement we have. So we will continue to use this discipline to make sure that we keep in check broadly the capital intensity in this cycle.
spk12: Got it. And then of the $1.9 to $2 billion budget this year, are you able to state how much is APS? And if you do end up selling the Canadian project this year, how much could the APS portion step down on an annualized basis?
spk08: So, look, you know, we don't disclose the split of the guidance. There is a A small increase in APS investment, but it's matched with increased cash flow. As you know, the way we look at APS investment is really based on the cash flow of the individual projects. And as an aside, we are generating very good cash flow within our APS project. So overall, as Olivier mentioned, the business of APS, because it's just a handful of projects, of projects is going to be pretty flat this year. And the investment level is definitely not going to increase in the future, in future years. Got it. Appreciate that. Thank you. Thank you.
spk05: Our next question is from Connor Lina with Morgan Stanley. Please go ahead.
spk04: Yeah, thanks. I was wondering if we could go back to pricing for a minute here. And I'm curious if you could maybe characterize It certainly sounds like pricing has become more broad-based, but are there specific areas globally or specific divisions in which you're realizing more pricing? And I guess the question is, when do we see this in the results? I mean, is this broad-based and you're going to be seeing it in 2022, or is this sort of early signs and it's more of a 2023 dynamic?
spk09: I think it's broad-based, but let me maybe underline where and how we see pricing conditions getting developed. And we see it in three ways. First, we believe that pricing conditions and favorable commercial terms are linked to performance. So performance in execution, performance contracts are differentiated in the impact we provide customers. Give us the opportunity to... negotiate favorable commercial terms, and keep or expand our market position with key customers. So I think this has started, and this is, depending on the region, this is something that impacts our service division, I would say, as our performance and our construction particularly. The second one is linked to... I think capacity, and I think capacity on unique technology, capacity on equipment that is tight, be it for offshore deployments or be it for high-volume intensity basins like North America. So this we have seen when the conditions are set, and we are getting an opportunity to expand from green shot to broad pricing improvement conditions. So this we have seen happening for the last year in North America. And we see this starting to happen in offshore deployments, where unique equipment have to be mobilized, have to be secured, and they are done at pricing conditions that have improved over the last few months. Finally, inflation. Inflation is something that exists. It's related to market condition. Inflation is something that we always deal with. And today, we are seeing more into the OECD and North America. We are dealing with inflation every day in every geo-unit, as we call it, over the years. And we know how to manage it through engagement of customer. It's more acute. It's more pronounced in some parts and some basins. And we're responding it with engagement of our customer and using the contract term we have to offset the inflation pressure we're getting. So it's all about performance, including our technology. It's all about capacity tightening. And it's about responding to the inflation pressure. So these three things are the level we are using and that are starting to be more broad, each of them across the different basins. Hence, it's progressive and it's touching and addressing different basins and all divisions throughout 2022 and further into 2023.
spk04: Thank you. That's all helpful context. The inflation topic, obviously, is one we haven't really talked about extensively, it hasn't seemed to prevent you guys from expanding margins significantly. But, you know, as we look into 2022, I'd say, you know, the market expectation seems to be that commodity deflation could occur, but labor inflation could increase. I'm curious what you're seeing on that front. And should we think about either of those having a meaningful impact on your margins, either positively or negatively?
spk09: I think first, I think as you mentioned, I think inflation is nothing new and it happened last year. And I think the performance of our supply organization, the way we are dealing with it, I think has helped us to mitigate and shift to the right, if I may, some of these. And secondly, I think we have been able to engage commercially to offset and create net pricing conditions. So I think we see this happening forward. And when it comes to resource versus equipment, I think resource is always a hot topic in our organization, but I think we respond to this by further improving and accelerating our digital operation adoption so that we offset some of the pressure on our resource as much as we can and can offset this pressure as well. So I think it's part of our toolbox that we use and that we'll continue to tune as the cycle unfolds.
spk04: Great. Thanks very much. Thank you, Gunal.
spk05: Our next question is from Roger Reed with Wells Fargo. Please go ahead.
spk10: Thank you, and good morning. Morning. Certainly good to see things turning around here. I just had a couple questions to follow up on some of the discussions about the expectations on EBITDA margins, the mix that you expect to see. I was curious what you would anticipate or what is embedded in the forecast in terms of a recovery in E&A spending within the overall spending increase, and if that's going to be less. And the reason I say that is we know several companies have essentially eliminated their E&A departments. How that might affect the EBITDA expansion that you anticipate, 22 and on into 23?
spk09: I think it's a valid question, but I think if you were to notice some of the highlights that we have released in the fourth quarter, we had a rebound of DNA data exploration cells. So the DNA is albeit very compressed compared to the peak of the last cycle. I think it's seeing a resurgence for two reasons. First, customers are trying to assess and reassert their reserve around their hubs, be it on the land that they own or be it on the key offshore hubs that they have developed to make sure they can fast track infiltrating and develop near field exploration. So we see a lot of infrastructure led exploration, not necessarily large green field, new, and we don't expect this to be the trend going forward. But we see that the exploration is much more surgical exploration, if I may use that word, to be near-field, backyard exploration, as we call it, around near infrastructure, so that the operator, particularly offshore, get to accelerate the return on the existing infrastructure and get a fast track, fast short cycle return on the existing offshore. So we see that in Latin America, we see that in Go from Mexico in Europe, in West Africa, this is very broad. So we are benefiting from it in our reservoir performance. We are benefiting from it in some of the key technology that we provide, including in digital. So I think while it has been a step down compared to previous cycle, there is a keen interest and investment resurgence in ENA for this reason. And I think we see that as a backup of FID, and it's true, particularly offshore.
spk10: I appreciate that. Thanks. And then just looking at the digital and integration segment, it's obviously one a lot of us are focused on, and I know you've got a lot of expectations embedded in it as well. I'm just curious if you look back over the last 12 months and forward over the next 12, kind of what's been a positive surprise, what's been maybe a little bit of a headwind there And if there's been a headwind, maybe how you would anticipate that, you know, reversing as we look into 22 and 23. Probably more from the customer side, but if there's anything internal as well.
spk09: No, internal, I think we are very pleased with the progress of the deploying and continue to build the digital foundation and digital platform foundation that support our strategy. Now, every customer has their own pace of adoption, their own internal digital infrastructure they choose to deploy in which we need to plug. So our choice two years ago to go with open data ecosystem foundation, the choice we have made to go in partnership with different cloud providers, different industry partners to expand our market reach has unlocked some of these customers to come and join us in our digital journey. with our platform. So we continue to work on it. The last two years could have been a better and larger adoption, possibly, but I think we have the foundation in place. We are in the early innings, as I said, of full adoption, considering the size, the oversized scale of our customer base. So I remain confident that this is just the first step, and this will only accelerate. So we have... We have the right foundation. So digital is here to stay. Digital transformation is here to accelerate across the industry. And I think we are taking it one customer at a time. And this is what is happening. So we are positive. Great. Thank you. Thank you.
spk05: Our next question is from Neil Mehta with Goldman Sachs. Please go ahead.
spk02: Good morning, team. Morning. Morning. Good morning. The first question is a modeling-specific one. Working capital, obviously, a big positive item this quarter. Can you talk about do you see it unwinding over the course of the year and any just thoughts on trajectory there? And as it relates to that, Liberty, it looks like you sold $109 million shares in the quarter. As it relates to that, should we think of that as a ratable exit, as this run rate in the open market, or are you going to be opportunistic around share price? Thank you.
spk08: Thank you, Neil. So working capital indeed was significantly lower in the second half, especially Q4. And again, this was very strong customer collections and customer advances. So looking at 2022, we expect the same pattern, very seasonality in working capital. Usually it increases in the first quarter. We have payment of annual incentives to employees and then gradually it improves in the subsequent quarters. mostly on cash collection. So we'll see the same in 2022. There will likely be higher levels in general of working capital consumption as activity accelerates, particularly considering the exit rates we are looking at. But we'll strive to maintain this to a minimum. And in any case, we we still want to generate double-digit free cash flow margins, and that's inclusive of any working capital movement. So that helps us managing with this boundary. As to Liberty, yes, we're quite happy. Our equity stake has actually improved quite a bit since the transaction was announced. We did decide to start monetizing part of the investment following the expiration of the lock-up period. We still hold a significant share of the equity, as I highlighted, about 31% after the transaction. So we'll continue to monitor the value of the investment going forward, and we'll decide on further monetization based on market conditions.
spk02: Thanks, Olivier. The follow-up is you announced a capital market stay on this call earlier in the call sometime in the second half. Can you just talk about what you want to achieve out of that day from a financial perspective? What type of framework?
spk09: I think we are willing to re-engage with all of you in a live session, first and foremost. We want to lay out clearly our strategic framework going forward in the cycle and beyond, including our three engines of growth, core, digital, and new energy, and we will support it by laying out our financial framework for return, including capital allocation and return to shareholders. That's what we aim at doing at that time, and we'll be clearly expressing in that setting the long-term target that we set.
spk02: Perfect.
spk09: Looking forward to seeing you live. Indeed. Thank you. I believe we have time for one last question, operator.
spk05: Okay. Very good. That last question is from Keith McKay with RBC Capital Markets. Please go ahead.
spk13: Hi, good morning. Morning, Keith. Yeah, I just wanted to maybe ask you to dig into your North American outlook for the 20% increase in spending this year. Can you maybe just sort of break that out in terms of what you might expect for drilling versus completion versus price inflation in general?
spk09: Yeah, good question. I think first, I think the North America outlook we are providing is inclusive of offshore and onshore, and onshore inclusive of U.S. and Canada. So I think it's a mix that is a bit, not difficult, but it's a lot of viable at play to decipher here. But to your specific question, we foresee indeed that the U.S. land, which is a big portion of this activity outlook, will be having a bias towards well construction. As the market is rotating from depleting the ducts to replenishing the ducts, hence the well construction rig-based activity will be the lead in a 20% plus. And I think we are set to respond to this with a well construction portfolio in that environment. And this will be very favorable to us. on the offshore environment is broad, and I think offshore environment will be execution of well construction and also reservoir performance. And so when you put all of this and you put a more modest and more moderate Canada environment, you have a mix that is favorable to our well construction and production system in U.S. lands and favorable to our reservoir performance and well construction in offshore environment, all of which combine to give us this ambition about 20%.
spk13: Perfect, thanks for that. And maybe one quick follow-up, just on the Canadian APS. I know there was a sales process outstanding. Just curious if you can give any update on your thinking there currently.
spk08: So we have received several offers for APS assets in Canada as part of the process we launched last year. So while we were assessing those proposals, the market conditions actually continued to improve and the value of the asset increased as a result. So we actually took the decision that the offers we had received were no longer reflective of the economic value and the cash flow potential of the asset. So we are not entertaining those offers at the moment. The asset is now generating very strong cash flows, but we remain open to all options.
spk13: Perfect. Thanks very much.
spk09: Thank you. So I believe we need to close the call. So before we close the call, I would like to leave you with a few takeaways. Firstly, the quality of our results during the fourth quarter, particularly the cash flow generation and our digital sales, have helped us close a remarkable year with financial outperformance during 2021, supporting significant EBITDA margin expansion and very sizable reduction of our net debt. Credits to the entire Schlumberger team for outstanding execution across all basins and divisions. Secondly, our performance strategy execution has resulted in significant progress in the adoption of our digital platform, the deployment of our Fit4Basin and transition technology, and the successful acceleration of our new energy venture, each developing towards a sizeable, addressable market. Thirdly, during 2021, we have enhanced our market position with key customers ahead of the significant upcycle, and will fully benefit from the scale and breadth of the fireball activity mix unfolding across all basins during 2022 and beyond. This will result in significant growth and further margin expansion and will support our double-digit free cash flow mission. Finally, the macroenvironment is increasingly supportive of a potential supercycle. As these fireball market conditions extend both onshore and offshore well beyond 2022, we have increased confidence in reaching our mid-cycle EBITDA margin ambition of 25% in the second half of 2023. Ladies and gentlemen, 2021 was a defining and transformative year for Shroom Magic, and 2022 presents the unique environment to substantially build upon our success and accelerate our growth into the future. Thank you very much.
spk05: Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T teleconference service. You may now disconnect.
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