Schlumberger : Q4 2022 Earnings Conference Call Transcript

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

Q4 2022 Schlumberger NV Earnings Call

EVENT DATE/TIME: JANUARY 20, 2023 / 2:30PM GMT

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JANUARY 20, 2023 / 2:30PM GMT, Q4 2022 Schlumberger NV Earnings Call

CORPORATE PARTICIPANTS

Ndubuisi Maduemezia Schlumberger Limited - VP of IR

Olivier Le Peuch Schlumberger Limited - CEO & Director

Stephane Biguet Schlumberger Limited - Executive VP & CFO

CONFERENCE CALL PARTICIPANTS

Arun Jayaram JPMorgan Chase & Co, Research Division - Senior Equity Research Analyst Chase Mulvehill BofA Securities, Research Division - Research Analyst

J. David Anderson Barclays Bank PLC, Research Division - Director and Senior North America Oilfield Services & Equipment Analyst James Carlyle West Evercore ISI Institutional Equities, Research Division - Senior MD

Kurt Kevin Hallead The Benchmark Company, LLC, Research Division - Research Analyst Luke Michael Lemoine Piper Sandler & Co., Research Division - MD & Senior Research Analyst

Roger David Read Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Research Analyst

Scott Andrew Gruber Citigroup Inc., Research Division - Director, Head of Americas Energy Sector & Senior Analyst

PRESENTATION

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the SLB Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to the Vice President of Investor Relations, ND Maduemezia. Please go ahead.

Ndubuisi Maduemezia Schlumberger Limited - VP of IR

Thank you, Leah. Good morning, and welcome to the SLB Fourth Quarter and Full Year 2022 Earnings Conference Call. Today's call is being hosted from Houston, following our Board meeting held earlier this week. Joining us on the call are Olivier Le Peuch, Chief Executive Officer; and Stephane Biguet, Chief Financial Officer.

Before we begin, I would like to remind all participants that some of the statements we'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 you, Olivier.

Olivier Le Peuch Schlumberger Limited - CEO & Director

Thank you, ND. Ladies and gentlemen, thank you for joining us on the call today. In my prepared remarks, I will cover our fourth quarter results and follow this with a quick review of our full year 2022 achievements. Then I will share some thoughts on the outlook for the full year. Stephane will then provide more detail on our financial results, and we will open for your questions.

To begin, we sustained growth momentum through the fourth quarter, delivering strong revenue growth and further margin expansion, both sequentially and year-over-year. The quarter was characterized by very strong activity growth in the Middle East and offshore and was augmented by robust year-end sales in Digital.

Growth was once again broad-based, and our operational, commercial and earnings performance was outstanding. We ended the fourth quarter with sequential revenue growth and margin expansion in North America and in all international areas. In the international markets, quarterly revenue topped $6 million for the first time in more than 4 years. Additionally, our international revenue growth rate has visibly outpaced international rig count growth since the cycle trough in 2020. Service pricing, new technology and digital adoption all continued to trend positively.

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JANUARY 20, 2023 / 2:30PM GMT, Q4 2022 Schlumberger NV Earnings Call

Looking broadly over the second half of the year, the pace of growth in North America significantly moderated. At the same time, international accelerated, growing in excess of 20% compared to the first half of the year, almost twice the growth rate of North America. We are clearly witnessing the start of a new phase of -- in the growth cycle, which will increasingly be driven by resilient international growth. This market dynamic led to a lower-than-usual cash flow performance at year-end. However, we further reduced net debt during the quarter and closed the year below our leverage target.

Overall, these fourth quarter results helped us surpass our revised full year revenue guidance, and we closed with EPS, pretax segment operating income and margins all at the highest levels in 7 years.

Switching to the full year. 2022 was pivotal for our industry and for SLB. It marked the second consecutive year of outperformance for the energy sector, providing further evidence of the multi-year up cycle and investment momentum that is underway. I would like to take a few minutes to reflect on what we achieved.

We announced our new brand identity with sustainability embedded in everything we do and opened a new chapter for the company. This, firmly positioned SLB to benefit from the underlying macro trends that will shape the future of energy: Oil and gas technology innovation, industrial decarbonization, digital transformation and new energy systems.

We executed consistently for our customers, achieving our best safety and operation integrity performance on record. We advanced our technology leadership and service quality differentiation, leading to more contract awards, higher technology adoption and increased pricing premium.

In our Core divisions, we expanded pretax operating margins by more than 300 basis points. This was led by well construction, which expanded margins by more than 550 basis points. We also launched new products, service and solutions that increase efficiency and lower operational emissions. You have seen many examples of this in today's press release.

Our fit-for-basin, technology access and Transition Technologies portfolio have fueled growth and margin expansion in every division and every geographic area throughout the year. And we continue to strengthen our Core portfolio for growth and position for future resilience and returns with the acquisition of Gyrodata and the announced joint venture with Aker Solutions for Subsea.

In Digital, we had strong growth in exploration data, INNOVATION FACTORI and AI solution sales, and the adoption of our new tech digital platform is accelerating. We ended the year with more than 270 DELFI customers, more than 70% growth in DELFI users, and our SaaS revenue more than doubled. These positive undercurrents, combined with higher APS revenue, contributed to the Digital & Integration division expanding pretax operating margins by more than 170 basis points.

We continue to build adjacent expansion opportunities for our Digital business, both in operation data space and beyond oil and gas, such as carbon management.

And in New Energy, we progressed technology development milestones, established new partnerships, particularly in CCS and made new investments that have created a focused yet comprehensive portfolio that offers promising growth opportunities for the future. Today, this portfolio comprises 5 business areas: Carbon solutions, hydrogen, geothermal and geo-energy, critical minerals and stationary energy storage. And we are accelerating our R&D efforts to develop technology solutions that address hard-to-abate industrial and power generation emissions.

As you see, our 3 engines of growth are on solid footing and are positioned for market success. In sustainability, we reduced our own carbon emissions intensity in Scopes 1 and 2. And we continue to be one of the highest-ranked companies in our industry across the 4 rating agencies.

We also made significant advances, launching SLB End-to-End Emission Solution, or SEES, an industry first to help our oil and gas customers address methane and other greenhouse gas emissions.

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JANUARY 20, 2023 / 2:30PM GMT, Q4 2022 Schlumberger NV Earnings Call

Finally, for our shareholders, we demonstrated our commitment to superior returns. We increased our dividend by 40% in April 2022, followed by a further 43% increase announced today. And we resumed our share buyback program this month.

These achievements highlight a remarkable year for SLB and speak to how we have successfully leveraged the breadth of our portfolio and our competitive strengths to deliver clear, leading outcomes for our customers and shareholders. We are primed for significant success and look forward to carrying momentum into the year ahead. I would like to extend my thanks to the entire SLB team for delivering an outstanding year.

Moving to the macro. We enter 2023 against a backdrop of market fundamentals that remain compelling for both oil and gas and low carbon energy resource.

First, despite concern for potential economic slowdown in certain regions, oil and gas demand growth remains resilient. The IEA forecasts that oil and gas demand will grow by 1.9 million barrels to reach approximately 102 million barrels per day. In parallel, markets will remain tightly supplied with modest production increase offset by the end of SPR releases, and well productivity declines in certain regions, most notably in North America.

Second, there is a greater sense of urgency around energy security. This is resulting in new investment in capacity expansion and diversity of supply. You will see this reflected in a number of new projects sanctioned, gas supply agreements signed and the return of offshore exploration, all at a pace unforeseen just 18 months ago.

And third, the secular trends of digital and decarbonization are set to accelerate, driven by significant digital technology advancement in cloud and AI, favorable government policy support in New Energy investments and increased spending on low carbon initiatives by operator globally. Underpinning everything, commodity prices remain at supportive levels for durable investment.

In North America, spending growth is expected to be more restrained after an exceptionally strong year in 2022. Capital spending growth is expected to increase in the high teens as rig counts potentially approach a plateau. Public companies, particularly the majors, are expected to increase short-cycle spending in key U.S. land basins, and drilling activity will remain strong to build up well inventory and support target production increases. In the U.S. Gulf of Mexico, where we have a significant presence, we expect the strong spending uplift to continue.

Turning to international. Markets are poised for strong growth in the Middle East and Latin America geographically and more broadly in offshore and in gas. In the Middle East, we expect record levels of upstream investment, with a ramp-up in various capacity expansion projects designed to deliver more gas production and a combined oil increment of 4 million barrels per day through 2030. Offshore activity will continue to strengthen as tieback and new development projects mobilize and new FIDs are sanctioned, while Russian activity is expected to contract.

Excluding Russia, customers' capital spending internationally is expected to increase in the mid-teens. The combination of long-cycle oil capacity expansion projects, offshore deepwater resurgence and strong gas development activity will be a key driver for the multiyear duration of this cycle. This outlook is very favorable for SLB with multiple paths for resilient growth in Core, Digital and New Energy.

On a full year basis, our ambition is to grow revenue in excess of 15% compared to 2022, supported by the step-up in international and offshore momentum, which will augment the growth established in North America. As a result, year-on-year adjusted EBITDA growth will be in the mid-20s, driven by further margin expansion.

More specifically, in the international markets, we foresee growth in the high teens, excluding Russia, which is set to decline this year. We expect the highest growth rates to be realized in the Middle East and in offshore markets, particularly in Latin America and in Africa. In North America, we anticipate about 20% growth supported by offshore strength, land drilling activity and higher pricing. Full year margin expansion will be driven by further positive pricing dynamics, increased technology adoption and improvements from our enhanced operating leverage, mainly internationally.

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JANUARY 20, 2023 / 2:30PM GMT, Q4 2022 Schlumberger NV Earnings Call

Let me share with you how we see this year unfolding. Directionally, during the first quarter, we anticipate a typical pattern of activity, beginning with the combined effects of seasonality and the absence of year-end product and digital sales.

Additionally, the first quarter will reflect some impact of year-on-year Russia activity decline. This will be followed by a rebound in the second quarter and further acceleration of growth trajectory in the second half of the year, particularly in the international markets. This typical pattern of activity and the favorable dynamics I described earlier combine to support the ambition we have set for full year growth and margin expansion.

In addition, the beneficial impacts of an earlier-than-expected reopening in China, the easing of inflationary trends and any further restrictions on Russia exports could lead to an acceleration of short cycle activity globally and fast tracking of FIDs internationally. This could present further upside over the second half of the year.

I will now turn the call over to Stephane.

Stephane Biguet Schlumberger Limited - Executive VP & CFO

Thank you, Olivier, and good morning, ladies and gentlemen. Fourth quarter earnings per share, excluding charges and credits, was $0.71. This represents an increase of $0.08 compared to the third quarter and an increase of $0.30 or 73% when compared to the same period of last year. In addition, we recorded a net credit of $0.03, which brought our GAAP EPS to $0.74. You can find details of the components of this net credit in the FAQs at the end of our earnings press release.

Overall, our fourth quarter revenue of $7.9 billion increased 5% sequentially and 27% year-on-year. All divisions posted sequential revenue growth, led by Digital & Integration and Reservoir Performance. From a geographical perspective, North America revenue grew 6% sequentially, while international revenue grew 5%, led by the Middle East.

Fourth quarter pretax operating margins of 19.8% improved 104 basis points sequentially and 393 basis points year-on-year. Notably, over 70% of our geo units posted their best margins since 2016. Adjusted EBITDA margin for the quarter of 24.4% was 219 basis points higher than the same quarter of last year, exceeding the guidance we provided at the beginning of the year.

Let me now go through the fourth quarter results for each division. Fourth quarter Digital & Integration revenue of $1 billion increased 12% sequentially with pretax operating margins expanding 386 basis points to 37.7%. This growth was driven by year-end exploration data licensing sales in the Gulf of Mexico and Africa, increased APS project activity in Ecuador and higher digital sales internationally.

Reservoir Performance revenue increased 7% sequentially, while margins expanded 146 basis points, primarily due to new projects and activity gains internationally, led by the Middle East and the offshore basins.

Well Construction revenue of $3.2 billion increased 5% sequentially due to strong activity from new projects and solid pricing improvements internationally, particularly in the Middle East and in Latin America. Margins of 21% declined 50 basis points as improved profitability from the higher activity in the Middle East and Latin America was more than offset by the onset of seasonal effects in the northern hemisphere.

Finally, Production Systems revenue of $2.2 billion was up 3% sequentially on higher international sales of artificial lift, completions and midstream production systems, partially offset by reduced sales of valves and subsea production systems. Margins improved 32 basis points due to favorable technology and project mix.

Now turning to our liquidity. Cash flow from operations during the quarter was $1.6 billion, and free cash flow was $855 million. This performance did not reflect the increase we typically experience in the last quarter of the year as free cash flow was $200 million lower than in the previous quarter. This was due to a combination of the following 4 factors.

First, we experienced extraordinary year-on-year fourth quarter revenue growth of 27%, representing incremental revenue of almost $1.7 billion.

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