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spk07: Ladies and gentlemen, thank you for standing by, and welcome to the Schlumberger Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, there will be an opportunity for your questions. You may press 1, then 0 to place your line into the question queue. You may remove yourself from the queue by repeating the same 1-0 command. As a reminder, this conference is being recorded. I would now like to turn the conference over to the Vice President of Investor Relations, N.D. Madhu Amazia. Please go ahead.
spk12: Thank you, Leah. Good morning, everyone, and welcome to the Schlumberger Limited Second Quarter 2022 Earnings Conference Call. Today's call has been hosted from Paris, following the Schlumberger Limited Board Meeting held earlier this week. Joining us on the call are Olivier Leperche, Chief Executive Officer, and Stéphane Diguet, 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 second quarter press release, which is on our website. With that, I will turn the call over to Olivier.
spk14: Thank you, Andy. Good day, ladies and gentlemen. Thank you for joining us on the call. In my prepared remarks today, I will cover three topics, starting with our second quarter results and our latest view of the macro environment. Thereafter, I will conclude with our outlook for the second half of the year and its competing attributes, which are very supportive of our raised guidance for the full year. The second quarter was a defining moment in the overall trajectory of the year, with significant growth in revenue, margin expansion, and earnings per share. Our execution was solid, and directionally, all trends were positively in our favor. Strong international activity growth, and steady drilling momentum in North America, sustained offshore recovery, and the broadening impact of improved pricing. We leveraged the power of our core, our global footprint, and differentiated technology to seize widening industry activity, demonstrating our ability to capture growth in every land and offshore basin from North America to most remote international basins. This was reflected in the broad dimension of growth in our second quarter results. as customers stepped up activity with a focus on increased performance and production. Above all, we effectively harnessed these positive dynamics and delivered very strong sequential quarterly revenue and earnings growth. In addition to the details provided in our earnings press release this morning, let me reiterate some performance highlights from the quarter. We recorded a 14% revenue increase, the largest sequential revenue increase in more than 10 decades, as revenue growth exceeded rate count increase both internationally and in North America. Year-on-year revenue growth accelerated to 20 percent, further sustaining robust growth momentum with a visible inflection in international markets at 50 percent growth over the same period last year. Growth was very broad across all dimensions, area, divisions, land and offshore, with spending visibly higher across all customer types. Internationally, sequential growth was recorded in all of our Middle East and Asia geo-units and all of Latin America. And in ECA, growth was pervasive across Europe, Scandinavia, and West Africa. In North America, we continue to post very solid growth offshore and onshore on increased drilling and completion activity. The rise of offshore activity, particularly deep water, was a key driver for our second quarter sequential growth in most regions, and in support of all divisions. Globally, all four divisions posted double-digit revenue growth and expanded margins sequentially, resulting in the highest quarterly operating margins level since 2015. In addition, another feature of the quarter was broadening pricing improvement, impacting all divisions, geographies, and operating environments. The quarter also marked a number of new contract wins and an increase in backlog for production systems and our re-equipment business, another leading indicator of the strength of the activity pipeline ahead of us. Notably, price improvement is also being reflected in production system backlog, which is significant for its later cycle implication for sustained margins expansion on an overall portfolio basis. To sum up, the second quarter emphasizes our clearly differentiated operational performance strategic execution, and financial results, both in North America and internationally. We have very strong momentum and have secured a solid pipeline of activity ahead of us. I'm very proud of the entire Schumerger team for delivering these exceptional results and demonstrating our unique value proposition for both our customers and our shareholders. Turning now to the macro. First, Energy security and urgency to establish more diverse and reliable source of oil and gas supply have become increasingly apparent through the year, exacerbated by the effect of ongoing conflict in Ukraine and a notable increase in periodic supply disruptions in certain regions. Second, supply and excess spare capacity remains very tight, as recent OPEC and IEA demand outlooks for 2022 and 23 remain constructive, continuing to suggest a coolant supply from North America and a more significant coolant supply from the international basins. Third, despite near-term concern of a global economic slowdown, the combination of energy security, favorable break-even price, and the urgency to grow long-term oil and gas production capacity will continue to support strong upstream E&P spending growth. Consequently, we are witnessing a decoupling of upstream spending from potential near-term deviant volatility, resulting in resilient global oil and gas activity growth in 2022 and beyond. Additionally, the factors supporting pricing tailwinds, more specifically the tightening service supply capacity both in NAM and increasingly in international markets, will continue to represent the defining characteristics of this upcycle and will support both revenue growth and margin expansion more than offsetting inflation. Looking more specifically at the second half of the year, we see very robust activity dynamics characterized by distinct acceleration of investment in the international and the continued strengthening of offshore activity as all operators, including IOC, step up spending. The energy security situation continues to drive structural activity increase, resulting from the increased focus on short-term production and the mid- to long-term capacity expansion across oil and gas plays. In addition, we also expect further exploration and appraisal activity, and the pricing dynamics expand so far to add further support to both the growth trajectory and the margins performance during the second half. This positive undercurrent will lead to an attractive mix and an increase in short and long cycle international projects, complementing already robust short cycle activity in North America. Directionally, during the second half of the year, we expect a strong continuation of growth in the core, led by production systems for the rest of the year, with digital integration benefiting from typically seasonally strong year-end sales. Also, as a result of the rotation of investment towards international basins, we anticipate a high growth rate during its second half to occur internationally, setting up a very nice backdrop for 2023 outlook. Based on this, we expect our H2 revenue this year to grow by at least high teens compared to the same period last year. Full year revenue growth will therefore be in high teens, presenting revenue of at least $27 billion for 2022. Furthermore, our adjusted EBITDA in absolute dollar terms will increase by at least 25% for the full year of 2022 when compared to 2021. Indeed, 2022 is shaping up to be an outstanding year for Sumeru. The power of our core, our digital and decarbonization leadership, and the expansive attribute of this upcycle enable us to leverage a focused North America business with an unparalleled international breadth. the combination of which favorably expose Schumerger to durable top-line growth, earnings, and further margin expansion potential that is unmatched in the sector. Beyond this, the momentum we are building through the second half of the year and the exit rates that we have achieved both very well for our 2023 outlook and financial ambition, both of which we will share in more details at our investor conference in November. I look forward to seeing many of you in person at this event. I will now turn the call over to Stéphane.
spk13: Thank you, Olivier, and good morning, ladies and gentlemen. Second quarter earnings per share, excluding charges and credits, was 50 cents. This represents an increase of 16 cents sequentially and 20 cents when compared to the second quarter of last year. This also represented the highest quarterly earnings per share since the fourth quarter of 2015. In addition, during the first quarter, we recorded a $0.14 gain relating to the further sale of a portion of our shares in Liberty Energy and a $0.03 gain relating to the sale of certain real estate, which brought our gap EPS to $0.67. Overall, our second quarter revenue of $6.8 billion increased 14% sequentially. This represented the strongest sequential quarterly growth since 2010. All four divisions experienced double-digit increases. Changes in foreign currency exchange rates had virtually no impact on the sequential revenue increase. Free tax operating margins expanded 212 basis points sequentially to 17.1%. And EBITDA margins increased 157 basis points to 22.6%. These increases largely reflect the seasonal rebound in activity, a favorable technology mix, particularly on higher offshore activities, and strong exploration data licensing sales in our digital and integration division. Margins also increased significantly as compared to the second quarter of last year. Pre-tax segment operating margins increased 279 basis points year on year, while adjusted EBITDA margins increased 133 basis points year on year. This margin performance is even more notable considering the inflationary headwinds we continue to face. This demonstrates our ability to manage inflation through our supply chain organization, as well as through pricing adjustments from our customers. Let me now go through the second quarter results for each division. Second quarter digital and integration revenue of $955 million increased 11% sequentially, with margins increasing 570 basis points to 39.7 percent. These increases were primarily due to higher exploration data licensing sales, including $95 million of transfer fees. Reservoir performance revenue of 1.3 billion increased 10 percent sequentially beyond the impact of the seasonal rebound in activity driven by growth both on land and offshore. Margins improved 143 basis points to 14.6%, primarily as a result of the seasonal recovery and higher offshore and exploration activity. Well construction revenue of $2.7 billion increased 12%, driven by strong growth and improved pricing, both internationally and in North America. Margins increased 134 basis points to 17.5 percent due to the higher activity, combined with a favorable technology mix and improved pricing. Finally, production systems revenue of 1.9 billion increased 18 percent sequentially, and margins increased 190 basis points to 9 percent. Global supply chain and logistics constraints started to abate, resulting in higher product deliveries and backlog conversion. International growth outpaced North America growth and was particularly strong in the Europe, CIS, Africa area. Now turning to our liquidity. During the quarter, we generated $408 million of cash flow from operations and negative free cash flow of $119 million. Working capital consumed $936 million of cash during the quarter, largely driven by higher receivables due to the significant revenue growth. However, RDSO improved sequentially. Inventory also increased as we continued to manage lead times in anticipation of continuous growth in the second half of the year particularly in our production systems division. Consistent with our historical trends, we expect our working capital and cash flow generation to significantly improve over the second half of the year. During the quarter, we made capital investments of $527 million. This amount includes CAPEX and investments in APS projects and seismic exploration data. Although it is reflected outside of free cash flow, our overall cash position was enhanced by the further sale of a portion of our shares in Liberty, which generated 430 million of net proceeds. We currently hold a 12% interest in Liberty. During the quarter, we also sold certain real estate, which resulted in proceeds of 120 million. As a result, Our net debt improved by $406 million during the quarter to $11 billion. This level of net debt represented a $2 billion improvement compared to the same period last year. Furthermore, we have now achieved our previously stated leverage target of two times net debt to EBITDA. We expect our leverage to continue decreasing throughout the rest of the year, on a combination of higher earnings and improved free cash flow, allowing us to further strengthen our balance sheet. This will provide us with the financial flexibility required to continue funding growth and increase returns to shareholders throughout the cycle. I will now turn the conference call back to Olivier.
spk14: Thank you, Stéphane. Ladies and gentlemen, I believe we are opening to the questions.
spk07: Very good. Ladies and gentlemen, once again, if you have a question, please press 1-0 on your telephone keypad. Our first question goes to the line of James West with Evercore ISI. Please go ahead.
spk10: Hey, good morning, Olivier, Stéphane. Morning, James. So, Olivier, I'm curious how you're thinking about the evolution of the, specifically the international cycle as we go through the next several quarters and really into next year. I mean, we're clearly, you know, OSS or energy is decoupling from the global economy. You're going to see some changes in probably activity levels, the mix, the pricing. It seems to me that kind of the best is still to come, I think, for the cycle. So I'm just kind of curious your broad outlook for international.
spk14: No, first I want to reinforce that the macro environment we are facing is quite unique. It's a confluence on unprecedented low spare capacity, eight years of underinvestment in international basins, and a call for energy security that is creating a double sourcing of both oil and gas, particularly international basins. So when you put that together, it creates not only a short cycle impulse on production enhancements to respond to that energy security, but also reinforce the need for expanding oil capacity, accelerating gas development, and the entire set of international basins, both offshore and onshore, benefit from it, as we see. So we have seen an inflection. in the sentiment of our customers, both national company, international oil company, and international independent to respond to that goal and turning and accelerating the investment and rotating the investment internationally visibly. So this is certainly a multi-legs, I will call it multi-phase, both oil and gas positive environment forward. we have seen that latin america has been the first to benefit from that inflection and we see that continuing going forward as uh from guiana to brazil to colombia and as a short cycle or to argentina as a shale exposed environment we force cities to be continuing including exploration offshore colombia or atlantic margin brazil this is this is set to continue going forward we are seeing this to to rotate in eca as you may have seen more than 13 the constraints we have in Russia-Ukraine region, and creating a superb undercurrent, as you call it, on all offshore basins in this region. And we have seen it very strong in Europe, West Africa, and Scandinavia, with the unique tax incentive set that will start to be kicking in next year will only accelerate. that China and East Mediterranean or Black Sea will also see continuous growth going forward. So, and you turn to Middle East and Asia, I think you have a combination of all capacity commitment increase for both UAE, Saudi, and to this extent, Kuwait, that will play out and will, in the case of KSA, create an uptick in offshore activity, partly from next year. You see that the gas that is being developed at large scale in the Middle East, both for domestic and for fuel substitution, that will continue to play to our strength in Qatar and conventional in both UAE and Saudi and Ottoman. And then you have the Asia market that is also... not shy of investment, and you see that long-term into the South China Sea as well. So I think it's multi-pronged, multi-color, I would say, and it has started strong in Lam, and it will turn to a further ECF, further Middle East, with inflection that will materialize as the quarter executed going forward.
spk10: Okay. Okay. Got it. Thanks. That's very helpful. Well, maybe a quick follow-up from me. You have your digital event coming up here in September. I've been following kind of the list of speakers, very impressive group that you're assembling. And I'm curious where you see the industry now, where you see Schlumberger and the industry and the digitalization or the digital journey of the industry. It seems to be that we're We've been inflecting, but we seem to be inflecting even further in digital, and certainly the results are proving that out in your income statement as well. So curious about digital.
spk14: No, I think you're correct. I think the number and the rich panels that we are assembling into this digital forum in September is significant. is there for two reasons. First and foremost is because the industry believes in digital, that digital can add a significant step up in efficiency that will continue to impact positively cost, cash generation, and will contribute to decarbonization of operations. So that's the reason why we are seeing customers coming in high number and record number to our digital forum. And the second reason we have this success is on our full leadership and platform strategy that has been adopted and that has been the cornerstone of our success in digital and we are using it to continue to transition all of our customer base towards this cloud platform and this is a long tail and this will certainly last all this decade and beyond and we are looking forward to success, long success here. But also we are using this platform and this digital capability to continue to enhance our operations to continue to transform our digital operation and to impact our customers and our own operation for efficiency and for performance. So lifting up through efficiency, lifting up the performance and hence getting a premium or getting an increment of market position. So it has a dual effect, but the success of Digital Forum is certainly the credit to our team, but also the proof that digital is now mainstream into this industry.
spk10: Got it. Thanks, Olivier.
spk07: And our next question is from David Anderson with Barclays. Please go ahead.
spk08: Hey, good morning, Olivier. So going across your numbers, you grew in every region and every segment, but the one I thought was really interesting was MENA. It grew 7% this quarter, but the Middle East hasn't even started yet. So I was wondering if you could just kind of start there and just help us, give us a sense of kind of where you stand today in terms of project mobilization and how that region is building out. And I'm just kind of curious, when do you fully expect to be up and running on the contracts you have in hand? And I guess related to that, it's been a while since we've seen a ramp up in activity over there, but we've often seen startup delays and higher costs that lead up to the work. So Aside from just pure execution, are there ways that you can navigate some of these risks? Are there lessons learned from past cycles? Or is it different because this is much more integrated drilling work that didn't exist in prior cycles?
spk14: No, I think I believe that our team has improved its execution track record. We have, as you may remember, three years ago, we took some action on the performing contract. And we learned and applied some best practice, best lessons, and project management to technology deployment and to the discipline in our competency management deployment and use of digital to help us execute this contract in a better way. And from the way we manage the maintenance cycle of our equipment to the way we deploy and do remote operation to control and help and support our people on the ground, I think we have progressed a lot in the last few years. And as such, the major contract we are starting always has a learning period. But I think we are accelerating this learning period by contrast to previous cycle. And I think we are set for success on all this project before soon. But we always have somewhere, somehow, an international base in a major project startup. But we expect this to be, I would say, the background that we'll have going forward. But our execution track record, lesson learned, use of digital best practice and discipline organization, including our competency that we deploy, has helped us to accelerate the lesson learned and to reach a maturity in terms of performance margins on those projects faster than in previous Ecolab. So I'm positive. And as I said, there is an infection building up in Middle East activity that will materialize in two or three countries, visibly into the second half, and will accelerate next year as we will see more offshore a shallow activity, particularly into the GCC environment in the Middle East, led by the Saudi oil, a major development that they're accelerating for oil capacity increase towards their 2027 one million barrel. This will translate into activity, so further activity increase will materialize, and we will benefit from it. The industry will certainly have a large ramp-up going forward. is the early cycle of growth in the Middle East.
spk08: The offshore market was actually my second question there. The offshore markets are really tailor-made for your technology profile, exploration, drilling, subsea boosting. And I recognize that there's a ramp-up on the shallow water side and the jackups in the Middle East. Is it too soon to say an overall kind of offshore inflection is here. We noticed a lot of your... Yeah, we saw a lot of your awards for offshore Gulf of Mexico. It's not too soon. Okay.
spk14: No, it's not too soon. In the second quarter, international offshore was accretive to our Gulf, international, visibly. And you can see it into the ECA, ECA Gulf. And I think... If you read some of the reports published by EA and others, I think you see that the outlook for 2022-2025 on offshore investments and FID activity will outpace visibly the 2016-2019 cycle. So we have early innings of this offshore cycle, but it's quite interesting, and it includes more exploration or more appraisal activity than we could have anticipated considering some of the macro, but we are seeing it from Namibia to Colombia to Asia. We are seeing interesting exploration happening to north of Brazil in the Atlantic margin. We are seeing acceleration of appraisal and exploration that combine and increase the beneficiary mix, I would say, that we are seeing in offshore environment. So yes, we are very well exposed, as we recently commented during during a conference in June. We believe that the average revenue intensity that we collect from an offshore environment can be up to five times or more what we collect in the land environment. And the scope that we have is quite unique from, as you said, from subsea to exploration, from data licensing to integrated rig well construction. So it's quite unique and will benefit increasingly on that offshore outlook. Excellent. Thank you very much. Thank you, Dave.
spk07: Our next question is from Chase Mulvihill with Bank of America. Please go ahead.
spk05: Hey, good morning, or I guess good afternoon over in Europe. I guess I want to come back to the topic on international and maybe follow up a little bit on James's question. You know, obviously, we're now seeing kind of three of the diversified service companies' international results. I mean, they've all surprised to the upside, so it feels like that activity may be a little bit higher than kind of what we all thought, you know, kind of heading into 2Q. But could you talk about the fundamental tightness that you're seeing, you know, across the international market? And whether you're seeing kind of broad-based pricing at this point, or is it just kind of more pockets of pricing increases? So just a little bit on pricing across the international side.
spk14: No, it's definitely broadening. The activity continues to ramp up and includes an offshore mix that typically has more pull on equipment concerning the backup and concerning the length of assignment of this equipment on the Offshore rigs, this is creating a pinch on the supply capacity that results into a boiling pricing pressure and pricing uplift that we are seeing in all environments, I would say, both from existing contracts where we have the opportunity to negotiate and offset, more than offset inflation, as in new tender and or in direct award where a customer wants to secure products future capacity. They want to secure technology. They want to secure performance. And as such, are accepting and are directly negotiating pricing increment on existing scope. So we are benefiting from this. The pricing environment is definitely broadening and improving. And we believe that going forward, as we see the inflection of international investment that has started to accelerate in the second half, as we anticipate second half international rate of growth will outpace the North America rate of growth. We see that to generate more flow and uplift for the pricing environment going forward.
spk05: Yep, that makes sense, and we agree with you there. As kind of a related follow-up, can you expand on, I guess, maybe your ultimate earnings power of the company? Obviously, you gave us some EBITDA guidance here, and when we think about the earnings, You know, for this year, you'll surpass last cycle's peak. But, you know, how should we be framing kind of the earnings power of Schlumberger this cycle? And maybe just kind of weave in the discussion around EBITDA margins and your confidence in maybe hitting the 25% mid-cycle margins that you had kind of guided as a target for kind of year-end 23. Do you think you can kind of hit that a little bit earlier now, given that you're outperforming on the margin side?
spk14: No, I think, as we have said before, I think there are two, three reasons why we are confident about our margin trajectory earnings power going forward. The first is that we had a high-grade portfolio in North America that has lifted our margin in North America to the level that we are comfortable now that we are competing and accretive. Secondly, we have created a significant reset in our operating leverage less than two years ago that is paying off and paying off at the time we are expanding and growing. And third, we believe that the combination of tight supply, already very visible in North America, and broadening, as I said, in international, combined with performance technology, performance integration, performance differentiation, is creating a further premium that will fall through to earnings. So we have a favorable mixed outlook That includes offshore. We have differential in technology and integration performance. And we have the foundation, the operating reset that we have done and the high grading we did for work. So you combine this with the upside that digital brings to this, and you get all in a significant upside that we have in our margin. And we have the anticipated 25% EBITDA margin sometime next year. And I think we are still very confident about that target.
spk05: Okay, perfect. I'll turn it back over. Thanks, Olivier.
spk14: Thank you.
spk07: Next, we have a question from Arun Jayarayam with JP Morgan. Please go ahead.
spk11: Yeah, good morning, Olivier. You know, obviously some concerns around Russia kind of heading into the print, but I was wondering if you could provide more color on the drivers of the 20% sequential type long grape that you saw in Europe, CIS, Africa. that manifested despite a decline in Russian revenue?
spk14: I think it's built on multiple G-units in West Africa and Europe and Scandinavia to a certain extent that has been benefiting from project timing, particularly in the production system that you have seen has benefited from a significant sequential growth. A large portion of that was in Europe. The same in offshore environment. I think we have offshore environment is picking up in that region, and this has been very beneficial to us, including some explode into the reservoir performance. So you combine all of this, and we have had a fairly substantial growth, and we don't see this necessarily abating a lot in the coming years. in the coming quarters. So I think we see a lot of further offshore and activity both in Africa, Europe, Scandinavia accelerating, as I said, next year. And that will more than offset the risk we are facing in the Russia outlook.
spk11: Great, great. And just my follow-up, Olivier, you mentioned how Schlumberger is hosting an investor day in November. I was wondering if you could talk about some of the objectives of that upcoming event, and what do you hope to showcase and highlight to investors at that time?
spk14: I think we come out on this during the last call, and I think it is an event where we invite investors and analysts to update them on our view first on the cycle. our strategy to execute on this cycle, and our long-term ambition we have for the company, building on our core and our digital and our new energy investment that will go forward. So that's where, and you will see technology, you will see, I think, an element of our strategy, and we will expose all of you to the view we have on the macro and the long-term ambition for the company.
spk11: Great. Thank you.
spk14: Welcome.
spk07: And our next question is from Neil Mehta with Goldman Sachs. Please go ahead.
spk06: Good morning, team. The first question was just around, good morning, Olivier, just around your Canada APS assets. How are you thinking about that? Are you still considering the sale or has the thought process changed given the macro environment? And alongside that, the monetization of the Liberty position as well, should we be thinking that Schlumberger will look to continue to exit?
spk13: Aaron, Stefan here. So look, on Palliser in Canada, our asset for APS, we are quite happy with the performance of this asset. Actually, it's generating very strong cash flows. So it's a great asset, and we are making the most of it at the moment. As it relates to Liberty, you have seen that we – we decided to monetize a large part of our investment in the second quarter when the market conditions were favorable. So we now hold only 12% of the equity. We will continue to monitor our investment going forward and we'll decide on further monetization based on market conditions like we did earlier. Okay.
spk06: That's good. That's helpful, Claire, isn't it? Then the second is a philosophical question. As Lumberjee is now getting to the point where the business is generating a decent amount of free cash flow and visibility for that free cash flow to grow, how do you think about return of capital? And as you think about the preferred methodology to return that capital, do you think a buyback or a dividend is the most effective way to get that cash back to shareholders?
spk13: Sure. Look, first, as you know, we increased our dividend by 40% starting with the July payments. So this was the first step in increasing returns to shareholders in this growth cycle. Now, as earnings and cash flows indeed continue to grow over the cycle, we will review opportunities constantly to increase returns to shareholders. And it will be either in the form of increased dividends or share repurchases We will also see exceptional cash proceeds from our continuous portfolio high-grading program, so this will give us further optionality. We will decide between dividends and share repurchases in due time. Dividend, of course, has to be sustainable, affordable for the long term, but share repurchases will be part of the equation as well.
spk07: Thank you, sir.
spk13: Thank you. Thank you.
spk07: Our next question comes from Scott Gruber with Citigroup. Please go ahead.
spk04: Yes, good afternoon. Afternoon, afternoon. So, as you mentioned, there's growing recession fears in the broader market, and that's weighed on oil and it's weighed on your stock. But, Olivia, as you mentioned, there seems to be great resiliency here to the growth outlook. But I am curious, roughly at what oil price do you think the multi-year double-digit recovery could be imperiled. You know, it just seems like there's a pretty big buffer between the current price and where that price could be. But I'm wondering your thoughts on it.
spk14: I think it's important. I think, first, I think we are living through a supply-led environment. I think it's quite unique, and it would take time before it recovers towards a demand-supply balance. So I think the quarters to come will be definitely quarters to be replenishing and securing enough spare capacity to avoid the overexposure to risk on the energy supply. But you have the undercurrent that is on energy security. that is creating a double sourcing that is a new attribute of demand and supply that is doubling down. So I think the buffer is pretty wide, in my opinion, and hence the short term and some of the risk on slowing or inflection into the demand growth going forward. there is a decoupling and there is resilience into the investment cycle that we are seeing as we speak. So whether this lasts, it's very difficult to say how long it will last, but I think we see that this cycle is stronger, longer and pricier than we had anticipated because of those unique conditions that the security supply has just added a new dimension to it. So I think there is a lot of space, in my opinion.
spk04: Yeah, we agree. And a follow-up on exploration. I know you touched on it and touched on its benefiting mix. But I'm curious just how you see the recovery here on the exploration side this cycle. The general assumption coming in was that exploration would lag. But just given a deep downturn in exploration activity and given renewed focus on energy security, should we now be assuming that exploration activity will actually rise in excess of the general recovery as it usually does? Is that possible here?
spk14: No. What we are witnessing, actually, is that below the screen, if I may use that expression, is that we are seeing a lot of exploration and appraisal program that has been that are being initiated with some good surprise that we are seeing in the new frontier, call it in Namibia, call it in Columbia, all the place. And we are seeing a program and support for new exploration in Asia as well. So yes, we are cautiously optimistic that indeed the exploration cycle is back to a scale that I think will be accredit to our mix. and we're giving us the unique exposure from our exploration data licensing and or from our Reserva Performance portfolio and digital also as we typically have a lot of license and digital solution that address the exploration geoscience workflows. So we see this as a mix that is a creative to our future and that is coming a little bit ahead of what we could have anticipated in this cycle.
spk04: I appreciate that color. Thank you.
spk14: Thank you.
spk07: Our next question is from Roger Reed with Wells Fargo. Please go ahead.
spk02: Yeah. Thank you. Good morning and good afternoon.
spk14: Morning.
spk02: Yes. What I would like to maybe understand, um, And focusing on kind of the back half and the exit this year on the EBITDA guidance, didn't really raise that despite the stronger Q2, obviously some positives on pricing. I was just wondering what you see to keep you, I don't know if cautious is the right term, but let's just say conservative in terms of EBITDA guidance relative to revenue guidance. Is that Russia or something else that's flowing through it?
spk14: I think first, let me reiterate the guidance we provided. We provided the guidance that our revenue will be a full year, $27 billion at least. and we provide the guidance that EBITDA in dollar terms will grow by at least 25 percent year-on-year towards from 2021. So, if you use this, you see that it goes up above the current consensus, even adjusted for the actual BID that we had in the second quarter. So, we foresee a raise in the EBITDA dollar for the full year with this guidance that I just shared.
spk02: Yeah, I understand that. I guess I was just really coming at the sort of 24, the up 200 basis points from Q2, Q4 of 21 to Q4 of 22. Given the seasonality and other things should help.
spk14: Yes, this is still our ambition. And I think this ambition is based on the season impact that we anticipate through a particular digital year-end sales that will follow our digital form. And the mix that we believe will be favorable, including international and offshore, that are accelerating in the second half. So this is the ambition we have set for the team, and this is the reason why we have guided to the 25% full-year EBITDA growth in dollar terms, or higher. Okay.
spk02: And then... This is a little more of a, especially given the commentary earlier about, you know, best quarter since back in 15. And this is a cycle where a lot of the EMP companies integrated are being conservative in terms of their pace of spending increase relative to what we've seen in the commodity prices. I'm just wondering, as you look at this cycle, this part of the recovery so far, what you can see in the back half this year, thinking about next, what looks the same, what looks different? I mean, obviously you expect the exploration recovery to continue, but if we just look at the, you know, call it development side, are we leaning more heavily into that? Is the mix more positive than in some other cycles or should it ultimately look a lot like any other cycle? Just, you know, it's going to be stronger in one place, weaker in another.
spk14: No, I think, I think what is, What is quite characteristic of this cycle is the broad nature of this cycle. We see it. We are going across the four divisions. We are going across the four areas. And we are seeing this set to continue. So we see, as I said, a strong inflection in international that will outpace in terms of rate of growth North America from the second half. Also offshore, the return of offshore being a characteristic that will only expand going forward. If you were to just look at the, in terms of numbers, the number of jackups being operating in shallow waters is actually on par, higher than it has been for the previous cycle at more than 300. And the deep water is starting to catch up. So I think we have a mix of signals that are clearly broadening the activity outlook. Hence, if I want to differentiate, it's more the supply-led and tightness of the market creating pricing conditions that is unique in this cycle, in addition to the broad nature of growth across markets. almost all country, in the coming quarters.
spk02: Great. Appreciate it.
spk14: Thank you. Yeah. It's positive in all dimensions, I would say. Customers, geographies, and division business line. So that's what we foresee is unique, and it's brought its production enhancement, it's some appraisal acceleration, and it's a development program, both oil and gas. Thank you.
spk07: Next, we move on to Conor Linna with Morgan Stanley. Please go ahead.
spk09: Yeah, thanks. We've been talking a lot about pricing, but I wanted to maybe just put a finer point on something. One of the big investor concerns on both Schlumberger and the broader oil services industry is the degree to which you'll be able to extract pricing or improve margins not just in some of the less core geographies, but also with some of your big national oil company customers. So I'm curious, based on how broad-based your comments have suggested pricing is, are you already seeing pricing or margins improve in some of your biggest regions with some of your biggest customers? Are your conversations indicating that more is to come? I'm just curious if you could address that.
spk14: No. As I commented before, it's broad. It's happening today. And it's expanding. So now, is it for every contract, for every customer? That's what we're working on. But the customer understands. The customer realizes the market is becoming tight. The customer cares for performance. The customer wants to secure capacity for their future plan. And we are seeing success into engagement with all of our customers into a positive response and adjustment of our price in the existing contract or into a new contract, into, as I said, a contract extension that are negotiated one-on-one and with pricing increments or ends into tender environment where the pricing is being lifted. So it's broad and it will continue to happen and I think A year ago, it was mostly in North America with screenshots internationally. I would say it's very established in North America, and it's broad now in international across all customers. And yes, some will take more time to materialize, and some will phase at a later date. But we are confident that the momentum has started, and the market will support it going forward.
spk09: Got it. Thank you. Maybe pivoting a little bit here, we've talked tangentially about Russia, but I was wondering if you could just clarify what your expectations are for the country, for your operations there, and effectively what the wind down might look like relative to your plans to cease investment and new contracts there.
spk14: I think I would just reiterate what we said earlier and bring a little bit of clarity, but our position hasn't changed since we communicated earlier this year. at the onset of this crisis. And we have suspended new investment and technology deployment into Russia. However, our structure give us the flexibility to have a portion country in full compliance with international sanctions. So at the same time, we continue to monitor the situation very, very closely, very carefully. And we'll always put the safety of our people and asset as a first priority. So we cannot and will not come up on a future, but we have taken a disposition to support. All right, thank you very much. Thank you.
spk07: And ladies and gentlemen, we have time for one last question. That is from Keith Mackey with RBC Capital Markets. Please go ahead.
spk01: Hi, good day, everyone.
spk13: Hey, good morning. Good morning, Keith.
spk01: I just would like to dig into a little bit more on the cash flow and free cash flow expectations for the second half of the year. Stefan, you mentioned that you expect that to improve. Just curious if you can put some color or magnitude around that, and is a double-digit free cash flow margin for the second half of the year in the cards?
spk13: So look first, let me come back to the second quarter to put some color. Our free cash flow was indeed slightly negative, even though the cash flow from operations improved sequentially. So as you have seen, it's all in the working capital. And to give a bit more details, two-thirds of the sequential working capital increase was... was due to an increase in receivables. But as I mentioned earlier, our DSO improved sequentially. So really, the increase in receivables is due to the significantly higher activity we experienced in the quarter. Also, the inventory is increased. As I mentioned, we are preparing to fulfill ongoing backlog, particularly in our production system division. We mentioned this is the fastest-growing division, so we want to seize all the opportunities there. So really, the working capital buildup we saw this quarter is to support the accelerated growth we are experiencing. As it relates to the rest of the year, we do expect the same pattern we see every year in the second half, where working capital gradually improves on higher customer collections. Then we have lower inventories due to higher product sales towards the second half. So we fully expect our free cash flow to significantly improve in the second half. as per historical trends. And clearly, we maintain our ambition to generate double-digit free cash flow margin over the cycle, for sure.
spk01: Got it. Okay. Thanks for that. And maybe just to follow up on capital, it looks like you moved to the top end of your $1.9 to $2 billion range. Can you talk about where this was? Is it activity-driven versus inflation-driven? And if it's ultimately where you think you'll land for the year... under your 27 billion revenue guidance?
spk13: So just to confirm, we are expecting our total capital investments, which include the CAPEX, exploration data cost, and APS investments for the full year, approximately $2 billion. As Olivia highlighted, clearly we are seeing higher demand for technology and equipment, mostly in our core service divisions. This is where the Most of the CAPEX goes well construction and reservoir performance. We are recording very strong year-on-year growth, so this is expected to continue. So we will continue, of course, to maintain discipline in the way we deploy any additional resource, allocating those to the countries and contracts with the best returns in accordance with our capital stewardship framework. So just one note, the capex portion of our total capital investment remains at the low end of our target range of 5% to 7% of revenue, and we fully intend to maintain that commitment throughout the growth cycle.
spk01: Perfect. Thank you very much for the color. Thank you.
spk07: And I do understand we have time for one more. That is Mark Bianchi with Cohen. Please go ahead.
spk03: Hello. Thank you. I wanted to ask first on Russia, just to follow up. I think last you updated, Russia was about 5% of total company revenue, but at the time the ruble had significantly devalued. We've seen an appreciation in the ruble since. Can you comment on where that revenue mix is today?
spk13: Yeah, Mark, sorry. Russia, throughout the first six months of 2022, is actually about 5% of our total worldwide revenue.
spk03: Got it. Okay, thank you, Stéphane. As we look at the back half of the year, perhaps you could provide a little more color on the segments. I understand you mentioned D&I and production systems driving the improvement, but the D&I benefit would be largely fourth quarter revenue. which is typical with seasonality, but there was an exceptional second quarter. So maybe you could just provide a little more color on the progression as we move through third quarter for the business.
spk14: Yes, we had indeed a very strong quarter in D&I due to some very strong data exploration sales. But at the same time, I think we will see indeed the D&I coming back to restoring its usual margin to low to mid 30s. and to progress through the H2 to finish on a strong end of the year through the effect of digital year and sales as well as experience in previous years. So while it was very strong, I think it's still in the 30s, and we expect to keep in the 30s, if not in the mid-30s, going forward. So we will see the uptick in the end of the year. Very good.
spk03: Thank you so much.
spk14: Thank you, Marc. Time to close indeed. Thank you. So, ladies and gentlemen, to conclude, let me share with you three key takeaways. Firstly, as our second quarter results demonstrate, our differentiated global market position, our industry-leading performance, and our technology portfolio are uniquely matched to the market dynamics of this cycle. Secondly, the market fundamentals continue to support significant investment growth in our sector, with an anticipated decoupling and resilience against the uncertainty of the pace of future demand growth. At the same time, the market conditions are increasingly supportive of net pricing impact onto current and future contracts, both in North America and internationally. Finally, our confidence in the activity mix outlook for the second half, particularly the rotation of investment internationally, combined with pricing tailwinds has led us to revise our full-year expectation for both the revenue and earnings growth. This bodes extremely well for our future beyond year-end as we continue to secure significant service and equipment backlog to support our ambition in this upcycle. Ladies and gentlemen, I believe there is no better time for Schlumberger as we continue to execute with much success our returns-focused strategy and are set to continue to outperform in a market increasingly in line with our strengths. Thank you very much.
spk07: Ladies and gentlemen that does conclude your conference for today. Thank you for your participation. You may now disconnect.
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