Q2 2020 Schlumberger NV Earnings Call
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. If you would like to ask a question. Please press. One then zero on your telephone keypad, you will hear acknowledgment that your line has been placed in Q and you may remove here.
So from the skew at any time by pressing one than zero again as a reminder, today's conference call is being recorded I would now like to turn the conference over to the Vice President of Investor Relations Simon Farrant. Please go ahead.
Good morning, Good afternoon, and good evening welcome to the somebody limited second quarter Twentytwenty earnings call. Today's code is being hosted from Houston wondering if somebody whose name attendant board meeting held earlier this week.
Joining us on the cool and developer Chief Executive Officer, and stuff and the Guy Chief Financial Officer.
Today's agenda Olivier will stop the cool with his perspective on the quota and updated view the industry macro off doing stuff I will get more detail financial result, then we'll open up your questions.
As always before we begin I'd like to remind participants that some of those types where were making today are forward looking these masses involve risks and uncertainties that could cause results to differ materially from those projected any statements right. After refer you to Alegis 10-K filing and all the FCC filings.
Comments today May also include non-GAAP financial measures additional details on reconciliation. So the most directly comparable GAAP financial measures can be found out second bought a press release, which is on our website now I'll turn the call have a two lydia.
Thank you Simon and good morning, ladies and gentlemen.
Thank you all for joining us on the cool.
Today, our prepared remarks remarks, I would like first to review the company's performance during the second quarter.
Oh, so come on sorry on the short term outlook and funding they reflect on where we certainly not Buffalo sought to division.
As we grow as well the most difficult quarters, you know it used to <unk> industry.
I won't first thing to women men of Scrummaging for that as he owns a four month and dedication during this unique circumstances and express my part not only what we have achieved but also in what we contributed for the as <unk> well, we walk and.
That's sitting on the call. This performance I would like to come on four key attributes that study may disqualifies, a unit any such statements.
Washington or performance miles in cash and liquidity and digital.
First of all personal about four months you bought it all best ever safety and service quality performance on Regal.
Indeed, our frequency off since you don't have used nearly 50% for many years ago wise, Oh, sorry, squidgy important nearly 40%.
All year on year to reach a new benchmark you need to get you performance for customers. This is attributes of up all his vision that is becoming a clear be films here do indeed execution and the very well I can go to page baucus than us.
So let me is the strength of our about operating margins with agent for some did come up on margins. Despite the most CV and a blood activity dog.
These amounts Vince has the potential just wanted a combination of swift action on fiber costs and decision to exit away to the sort shoulder combined.
Just the organization structure, all four divisions and refocus them out can you walk through and five key basins with activity you significantly leaner and more responsive adapted to the new industry normal and strategically aligned we thought cellphones division.
You've done a city the impact of these decisive action also combined we pulled but I'm not kept it all starts you pull them and continued use the adoption of new technology. That's good I'd is only about a vision and digital solutions.
I think we'll take on the most you know for international franchise remain remarkably resilient flux in country.
Despite not terribly meaningful collection and smells Union buckets on the major disruption in Ecuador.
As outlined in the earnings release domestic you'll fall, Joe Mcus and three auto for business segments.
The expanded or maintain margin internationally clearly demonstrating the strength of apologize and there is you don't have <unk> earnings power.
No somebody go we accelerated the restructuring and you should it not you I'm crazy on schedule feet and yes. It light business more than we've seen you pick on time on litigation to fixed and these costs are cost at this point, we have shut down about 250, you'll fall facilities and continue to make progress on the dictators excess contract.
In short, we headed to business for not get though small scale and lower growth outlook, but with higher returns.
So the gosh grew about four months, what excuse me sort of during the quarter, bringing on very strong cash flow from operations and leveraging digressive additional for capital spending.
In fact got school Westwood strong Evan when when excluding working capital and accounting for the significant negative impact of severance payments during the quarter.
See you know the liquidity position of the companies seem to be going to improve during Q2, why dept, whether this would be lower year over year.
Yeah function to degree to Jim cash preservation as being a very careful crews from them title management team and finance function. During the last several months and I'm quite satisfied to maybe get a these very difficult Walter we such a positive outcome.
Funding the adoption of digital both internally and externally is becoming a major before muscle milk fucked off the funds and was very impactful doing the so called <unk> and financially.
Indemnity, we made significant improvements in the deployment of do you sort of relations populated remote operations and do you still inspections as it could be 19, probably because sections create that the catalyst for fear of adoption.
I'll, Judy remote operations exponents, well, 25% during the call to exceed two first of all drilling activity.
We haven't read 1250, whereas in Q2, using our remote operations contributed supported by more than two other than 50 hemodialysis patients ingenious.
In addition, we all know performing over 1000. These don't inspection that week applied to maintenance manufacturing or integration applications across more than 40 countries leveraging our diesel backbone infrastructure.
Yeah for doing the quality or do you still operation odd Mughnieh, playing in fact lowering the cost of said it did you read the size of for booking crews and increasing efficiency cost abortion lifecycle and contributing to our operating margins.
If somebody we so great to adoption of all open digital platform for both upsell phase and operations solution. The diversity and that's all these stores solution deployed to focus them as I was describing several examples earnings release Netflix to going maturity of the do you still consummation long history and the success.
Oh, I'll defer to petrol.
I couldn't be prop to be associated with Exxonmobil folded the prominently plant and it ops digital solutions close on getting planning and operation including automation.
You should assume vision for the future up on your street, we saw ambition to deliver faster and low cost was true diesel declared.
I was digitalization is accelerating we're also seeing continued pulled us indictors adoption, despite the challenging opex.
So before basing that that's almost focus the energy generates seem to dig seemed to pick up if you don't see gains for customers.
Well it all this quarter promise to be Miss from an active adult CIC and it certainly was.
However, the performance and because you don't so faulting I'll decisive action to cause f. gosh in margins.
The continued execution of all strategy, including digital video to based home outcome is setting the companys competitiveness.
Enabling us to avoid the weve because you know margins so truly smaller market.
Now, let me turn to the shop them outlook.
Given the uncertainties regarding the pace of economy, and ultimately would go right. The range of activity outcomes for the single novel did you always did wide.
However, with what we know and see today, we expect a good activity decline to recede into a soft landing in coming months up some 70 get to be back from could be 19 on it couldn't make recovery or escalating rig activity disruption.
In the North American markets. There is an uptick of the completion activity in the U.S. comforted by the slow but continued decline on both land and offshore activity.
The flock rebound is expected lots them to the seasonal decline a joanne provided commodity pricing remains stable.
International activity outlook Appeals mix due to seasonal effect across the different basins. However is that indicative of slight sequential collections home for drilling activity during Q3 Bucks you'd already for deepwater exploration.
Well this reduced combined north American international activity outlook and based on our position in the respective markets. We'll just see better revenue remained essentially flat sequentially on a global business, which was slight positive uptick internationally offset by flat to low single digit decline in North America.
In this context and upsell and you said you sit back due to go to be 19, we expect EBITDA and operating income growth and the respective margins to expand during Q3 above and beyond the positive impact of imbalance shops.
These margins we benefit from the combination of in chemical in structuring cost savings during the second half of the Euro tailwinds from like a real activity in Ecuador, and continued execution of our capital stewardship strategic.
Well I recalled you did you not to get to 12 of the cycle. We are actually since you're going inflection points. You know margins about four months ahead of the recovery and despite the backdrop for significantly smaller market size.
Cash flow performance NUKEM equal so we continue to benefit from that said, we have I guess eve capital spend adjustment focused on working capital efficiency and new chemulpo cash savings from our his structuring pull up.
Ambition to single out remains positive free cash flow despite anticipated severance payments.
We've done over weight flipped any activity outlook for the next two or three quarter, though.
Ambition is to execute on a bus of visible margins recovering and help us free cash flow generation as we transition into 2021.
Well not going to use that as you less than one drug but market conditions created a catalyst to exit about the restructuring of the company to align we thought that phones division.
The only the results of these cottages accretion already visibility now operational performance, our financial results and Youd in alignment with the new industry landscape.
Our mid to long term financial targets remain intact, and clearly focused on returns.
But do you start the steps accomplished during the quarter locally. So do you feel vision, but also create the kipp bus to restore margins and returns performance. Despite the security small basket.
And now we'll end the call just if I will discuss Q2 financials and in fact of our cost out programming to be multi day.
Thank you all even.
Good morning, ladies and gentlemen, and thank you for participating in this conference call.
Second quarter earnings per share excluding charges and credits was five cents.
Represents a decrease of 20 cents sequentially and self do you sense when compared to the same quarter over last year.
During the quarter, we recall the $3.7 billion of pretax charges. These charges primarily relates to workforce reductions the impairment of any MTS investments and excess assets you can find details of the components in the perfect use at the end of our earnings press release.
Overall than the $1 billion of severance the rest of the charges are largely non cash.
The charge relating to severance costs, both the permanent fix cost reductions we are implementing as part of the company restructuring.
Well as the valuable headcount reductions, we are executing well just have reduced level of activity.
It is important to note that these impairments well all recall the those over the end of June.
Therefore, our second quarter results did not include any benefit from reduced expenses as a result of his charges.
However, going fault the impact of the Q2 charges will result in reduced depreciation and amortization expense of approximately $80 million on a quarterly basis why leaves expense will be reduced by 25 million.
Approximately 70 million of these quarterly pre tax reduction will be reflected in the production segment.
The remaining 55 million will be reflected amongst the characterization drilling and Cameron segments.
The quarterly after tax impact of these reductions is approximately seven cents you need to your stones.
I will now summarize the main driver AWS, although our second quarter results overall, all second quarter revenue of $5.4 billion decreased 28 Dawson sequentially.
Pretax segment operating margins decreased 303 basis points to 7.4 person.
This week sections, we have taken to reduce valuable costs combined with the early results of our restructuring and structural cost reduction on the false.
Resulted in decremental margins of less than 20, Bill Sun, both sequentially and year over year.
As a reminder, our restructuring program will permanently removed $1.5 billion of fixed costs, we've more than how tough relating to our international businesses.
Well, let's think of clarity, let me highlight that visa true cash savings when do not take into account the reduction in depreciation and amortization expense as a result of impairment charges.
We have achieved approximately 40% of is 1.5 billion targets in the second quarter.
And we aim to complete the large majority of the remainder before the end of the year.
This will provide a strong tailwinds to our margins in the second half of the euro and into 2021.
Now looking at our results by business segment second quarter result, walk characterization revenue of 1.1 billion decreased 20% sequentially, while margins increased 357 basis points to 7.6 vessels.
The revenue decrease was due to customer Oscar telling discretionary exploration related expenditures.
However margins expanded as a results of the implementation of prompt cost reduction measures and the residents of our digital businesses.
The adoption of new wireline technology also contributed to the margin increase.
Drilling revenue of 1.7 billion decreased 24%, while margins fell by 200 than any 89 basis points to 9.6 Docelles. These decreases were primarily driven by your sub declined in the North America land rig counts and Covidien related restrictions in Latin America Africa and Europe.
Production revenue of 1.6 billion decreased 40% sequentially.
And margins fell to 650 basis points to 1.5%.
These declines were largely a result of a sharp drop in pressure pumping activity.
South America land.
Additionally, a production interruption inequitable, but was caused by a major oil landslide resulted in the revenue reduction this quarter of approximately 100 million dollar cost.
In our asset performance solutions oriented business.
He's had a significant I would be temporary impact on our decremental margins.
Lastly, as a result of its production interruption, partially offset by the effects of the Q2 environment, We anticipate MTS amortization expense will increase by approximately $40 million next quarter.
Finally, Cameron revenue of 1 billion decreased 19%, while margins decreased by 180 basis points to 7.9%.
International margin expansion, but surely have said the impact of the CV activity decline in North America lands.
Let me now turn to our liquidity.
I was very pleased with our cash flow generation during the second quarter given the environment, we were operating in.
We generated $803 million of cash flow from operations and 400 than 65 million of free cash flow.
Both of these amounts are higher than last quarter, despite making $370 million of severance payments during the second quarter.
As a result, we ended the quarter Weve total cash and investments of $3.6 billion. Our net debt at the end of the quarter was 15.8 billion, an increase of 479 million compared to last quarter, but down almost 1 billion when compared to the same time last year.
During the quarter, we spent 251 million on Capex and invested 61 million in the Ts projects.
Our total capital spends for Twentytwenty, including eight years and multi client will now be approximately $1.5 billion. This represents a 45% decrease as compared to 2019, mostly coming from lower Capex in North America and.
Used investments in the Ts projects.
Our total Abe, yes investments for Twentytwenty was revised down to about $300 million.
Despite the second quarter on being the most challenging quarter warm weather on these tree, we will still be able to take steps to further strengthen the balance sheet.
We issued 1 billion euros of 1.3, 75% notes due 2026.
$900 million of two point 65 Carson notes due 2015.
And 1 million Euro of 2% notes due 2042.
By issuing these notes at attractive rates, we were able to retire approximately 1.5 billion the bones of its welcoming during the next four quarters. It also allows us to pay down the existing commercial paper, providing us with additional flexibility.
We ended the quarter only 1.2 billion of commercial paper borrowings outstanding.
Therefore, after considering the $3.6 billion of cash on hand, as well as $6.2 billion of Undrawn credit facilities.
We had approximately $9.8 billion of liquidity available to us at the end of the quarter.
This represents an increase of 3 billion from where we ended last quarter.
In light of its available liquidity and the value sections, we have taken during the quarter.
Our debt maturity profile over the next 24 month is quite manageable.
We only have 500 million of bonds coming due in the fourth quarter over this year.
And then over our 665 million coming due in the fourth quarter of 2021.
The next maturity after that will only come in August 2022.
Before I conclude let me so quick world about our financial reporting going forward.
The corporate reorganization, we are undertaking is a significant exercise, but we'll take some time to fully implement.
Before we will continue to report our results for the third quarter consistent with our historical practices.
Starting with the fourth quarter, we we report our results on the business of the four new divisions, we will continue to disclose revenue on a geographic basis quarterly in line. We've all historical formats in of awards split between North America, Latin America is yet and the middle East.
Going forward all the once a year end in connection with our fourth quarter and for your earnings release, we will disclose pretax operating income split between North America and the rest of the World. These margins will include the results of the Cameron businesses.
Shortly after we issue of third quarter earnings release, we will provide historical pro forma financial information based upon the new division structure as well as the on your geographic margins to assist you will be on modeling.
I will now turn the conference call back to really.
Yes. Thank you. Thank you Stefan so I think well ready to take your questions.
Thank you, ladies and gentlemen, once again, if you would like to ask a question. Please press. One then zero on your telephone keypad and our first question is from the line of James West with Evercore ISI.
Go ahead.
Hey, good morning with it.
Good morning.
So clearly digital technologies are gaining a lot of traction as the industry accelerates.
Digital journey and you guys are of course, leading this this charge here could you perhaps breakout how much of your revenue and earnings comes from digital today and what the what's your plans or for that percentage in the future.
Oh, Thank you James So I think as we commented before I think well on ready to disclose the details of our revenue and margin contribution net contribution from the digital business.
Surface to set up I think it has been I kept you from the from the growth.
There's been right the segment of our business that has been declining the lease in the last quarter.
It has been the one that has seen the most the expansion of margin as well during the quarter. So I think it is material to our business ambition remains the same we want to double this missteps in a in a midterm and but the but its size NFC will use for that to a venue ultra revenues revenues of.
Our sub so face digital platform well, we are doing these transition to cloud based dempsey solution with our customers and I think we are we seeing a lot of production into that that space and I think this will give us new revenue stream alpha infrastructure cloud the operation in addition to transformations.
This is why we customer that we position so only we want to open a new business around data and the beat on the analytics, albeit on that so face operational data that we start to offer platform for data exchange offer trading those data. So we have introduced Guyana.
As a platform and I think were seeing success through national data rooms, as you have seen in Egypt.
And although place in the world. So I think that's that's a civil new revenue stream that you're developing and suddenly due to the provision I think you have seen recent announcement of the partnership we have with.
We have developed with we fix on and you are about three or more in the future continue to lead in this drilling operation as well as pollution abortion Essentia our partner, our JV and I think this outage for your go to stream that there were being compared to one we had before so this will give us an opportunity to expand.
In multiple facets and not only into the license for subsurface application.
Okay, Great that's very helpful.
Maybe just a quick follow up.
Our transition to digital understanding that your costs are lower but also the customer sees a lower cost is the ultimate EBITDA.
Dollars, the absolute dollars or the higher or lower.
I think no doubt I think weve this growth and active margin we'd be higher I think.
Reducing the benefits a the benefits from a from digital we knew that will also benefit our customer. That's the reason why we are seeing this adoption because they realize that the extract efficiency the transform their own a partial to walk through and as such a reduced total cost.
Of the of the last in the lifecycle of the operation. So we will benefit that we benefit we believe DH well ahead of our competitors and we own the platform that the industry is adopting so that we give us a assist enable the foundation.
Great Thanks for that.
Thank you James.
And our next question is from Sean Meakim with JP Morgan. Please go ahead.
Thank you good morning.
Thanks.
Maybe a.
The cost reduction plan as robust no one down.
His ability to execute.
We saw in the second quarter.
As we discussed in the past the medium term you can't really caught your way to prosperity. So you'll be greater if we can maybe learn more about how you plan to approach. The next cycle last cycle. The service sector led which discounts to customers and that was not least the large cap diversified I'm sure you receive the same my question is tomorrow.
Around.
As you're going to execute well on the cost out program looking beyond that how do we defend the topline trajectory of the coming cycle.
Yes, sure nothing you have to realize that the compared to the last cycle I think fees have change.
And first and foremost I think the the margins been reset for the whole industry. The pricing concession have been steep and we have not recovered from the from those from this pricing from the last cycle. So I think first there's not much that we can give on share and I think the approach that we are taking we focused the most sector.
We do on gauge collaboratively across the full lifecycle of that provision and eliminate waste and focus on on gauging to reduce cost of service delivery jointly and I think we are seeing success. In this approach we are being a awarded the and expanded scope when we see.
Exceed into eliminating costs and anonymity eliminating waste cost the cause of any change so you'll see more this approach and less of a offer for pricing because a they use it doesn't have much to give and I think our customers realize this and I think well Maki more collaborative yes, we had the in the last the last.
Five years on this and I believe that the margins expansion that we are realizing all the video on the margin we are.
Realizing today will be somebody will be able to two to keep and build upon as a as the recovery will start to happen.
Thank you for that I think that makes sense, then I guess.
As we look out what maybe.
All of years away, but at some point there'll be another large.
And are that'll hit the market and I think thats, probably where the rubber meets the road to some degree how do you think how do you think about the competitive dynamics for those large multiyear tenders that I've always been kind of the thorn in that side of the sector.
I think.
The listen learn from from a from this thing is the industry as learned to be capital discipline and I think a we have learn all of us and I think we have suffered from.
Some of the steps, we've taken as an industry and I think the the capital discipline that I've seen that we are using today I think is very prominent in many places and I think we have been adding a very strict capital stewardship pull one where we make it clear choice on on the on the.
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I would say allocating capital, where we see returns and as such we are creating the opportunity that comes our way and I believe some of our computer applying the same approach as the return.
Not acceptable to where they were and they would have been at the trough. So I think the capital discipline is something that as strange and I think I expect that tick up until the spin will be an amount of of success in the future. Now this being said very large tender radar scope a that have a runway for mid years, we'd be competitive, but I think we will.
We demonstrate that we have the most competitive cost the platform to operate those are large complex and we'd be able to retain margins in those conditions.
Understood. Thanks, a lot living.
Thank you Sean.
And next we have a question from Angie Sedita with Goldman Sachs. Please go ahead.
Good morning, guys.
Morning, Angie.
Good morning, So our route.
Q3 guidance for.
Operating income.
Can you share any additional thoughts around magnitude as far as margins on the bottom line and then the levers within those number as hot as Ecuador factor into these numbers as it comes back as well as the furlough employees coming back and any additional thoughts around the ABS tariff in Ecuador, given oil price.
Let me Angie let me, let me offer some very qualitative comments and I will let.
Stefan IVC believed that we need to add so first I don't think we are in a position where we would like to give quantitative guidance on these I think are considering the level of uncertainty in the mix that to the as we have seen in the second quarter changed dramatically battery internationally I don't think I will go forward on the qualitative guidance going forward, but I think were seeing positive when they get.
Obviously on the positive side were seeing that the full through the income Apollo impact of our switching costs that we quoted to you to fall into.
Into a tailwind for margins will also serve you see the return of all it quite active yes, you have heard 100 me on that I impact on the topline that's come back both EBITDA and margins in the antibody margins in the fourth quarter and at the same time I think the the.
Our execution a that you have seen happening on capital C. Archie bunker success of technology, including digital will also be.
And now this would be partially offset on one of them will be to the topline measure that we took exceptional measure we took during the second quarter will not.
The be there again, but I think as as a mix you understand that this will lift our margin despite a topline flat.
They're just two other what have you may be one additional effect or on top of the incremental fixed cost savings is also the fourth quarter effect of the the large head count reductions we executed in Q2, the exit rates of was head count reduction was was much larger than the average so we love that a tailwind does win.
Okay. Okay fair enough and then I mean, you really had impressive results and reservoir characterization as far as margins can you talk a little bit around how much of that was driven by cost cutting hurt.
Impact of digital and maybe even wireline and.
And when can we start to see it a similar transformation across your other businesses.
No you're very very good question I think the first I think another tax position is set into one of these the list as in the lease exposure to North America as a benefit.
Had the benefit on international as active as I did mention three or four business group a flattening like spending much internationally and that was the case was elected decision now to the specific I would sit at the maybe more than our home say a came from these I guess induction we'd come on the structure on the cost solution, but I think you about half again.
From a technology adoption and thing there is adoption and there was about the dialogue valuation from wireline with all the platform of choice continue to.
To be very very successful campaign of the have any frogs less exploration activity, a we're able to deploy this new technology with much success and it was the highest quarter them a revenue for that the new technology wall and the Andy It also set a.
It's a technology success.
As much and technology adoption success success as much has a cost structure. So the other segment as technology.
And we'll continue to.
To succeed as well, so I'm I'm already about our ability to grow margin.
In every business group, but obviously, we benefited more from the defense section of our technology in reservoir characterization.
Okay.
Thanks Fair enough turn it over.
Hi, Good and our next question is from the line of Scott Gruber with Citigroup. Please go ahead.
Yes, good morning.
Good morning.
Stefan.
Can you walk through a few other major cash items over the next few quarters, specifically with regard to to working cap and what are your expectations for the size of the traditional second half release and then what are your.
Expectations. So it's a cash severance in the second half and how does that split between Threeq and Fourq you.
Sure good morning.
Look for the second half, we actually expect AUR or cash flow from operations to remain very strong even if indeed youre right. The working capital release will not be as large as it was in the in Q2 because activity.
We assume activities stabilizing as we said in the second.
However, again, we've already shown on a fixed costs cash savings are materializing in the.
In the rest of the euro and the reduced.
The intensity of our capital spend we think we can still generate positive free cash flow in the second our despite the the additional severance payments that we will incur and to your question. We think we will incur on most of the remaining.
Severance payments in the second half of the year.
We should think about it it's a billion less the threeseventy paid in the second quarter in terms of what's remaining for cash severance that way to think about it.
Yeah, you can put a little bit more because we had.
We are the 200 million of provisions at the end of March as well.
Okay.
And then just on the costs out program, you mentioned, realizing about 40% one and half billion. During the second quarter is that a full quarter impact or is that realized by quarter end.
Just some color on realizing and majority of the remainder in the second half is that fairly linear or weighted towards Q4 Q.
So it is a full quarter impact meaning that the Q2 results include the 40% and we exist in the quarter at a true yet the much higher rates of this is why do we have a nice tailwind starting into Q3 and going into Q4 with the remaining 60%. Most of these these are lot of it was already.
We realized that the end of all three girls at the end of the quarter.
Great appreciate the color. Thank you.
Thank you.
Actually got a line of Bill Herbert with Simmons Energy. Please go ahead.
Thanks, Good morning.
On a baby, yes, I. Thank you.
In a world of.
Becker OPEC spare capacity in inventory.
Which can largely meet the rising call on Opex.
I will put over the next two years, how should we think about the uptake for Rscg services, given the low hanging fruit with regard to monetizing production.
Yeah, you are I think the SCG. The there are other cactus and group I think as multiple aspect to it I think one.
Is the digital and I think this one a independently of the trajectory of the recovery of the supply demand balance will.
Continue to benefit from the the digital transformation that is happening in our industry. When it comes to the wireline that this thing the reservation aspect I think you have to to get to aspect. One is a first exploration a silly is happening and we continue to happen a there were more than all of the wells.
Explore doing to the offshore during this quarter and there will be more than under the was exploration wells in the fourth quarter and and the ability we have traditional shouldn't technology with platform such as although we continue to be providing us support and a sustained margin in this environment certainly.
There's a lot acquisition also those characterization for policing as our so that's when there is a short cycle upside of trying to extract more from existing it was our result exploring a we are playing technology for intervention well blame technology for testing, although as well. So that you can optimize and I think we have seen actually.
A more resilience of that wireline intervention pollution services during the quarter than on the evaluation services during the last quarter. So am I reading this I'm optimistic and quite a lot showed that the property, we obviously well balanced and include fallback position.
Pollution Khalid technology that we make additions as our customer will go back into extracting more from the reservoir pushed policing feed that.
Okay. Thank you and then Stephane with regard to.
I guess depreciation did you say that Q3 that total depreciation will be down $80 million quarter on quarter.
Yes, it will be from the impairment effects. This.
However, you will also see excuse me you will also see.
A reverse order coming from the Ecuador landslide incident, but with that will partially offset a specific.
But certainly were down <unk> dollar lenient Yeah go ahead.
Got it so that so.
So the net impact we had.
$604 million in Q2, approximately what you think the number in the guidance is for Q3.
It's not going to be so far from Q2, if you assume the same revenue levels we have.
Got it thank you very much.
Thank you.
And our next question is from Kurt Hallead with RBC. Please go ahead.
Good morning, good afternoon.
Well incur well thank you.
Excellent. Thanks, Thanks for thanks for the opportunity has question here.
So.
Wondering if you can potentially give us a little bit more color around what maybe well you may see happening in terms of business dynamics in the middle East there's.
In a couple other.
Earnings reports.
Competitors. This week that seems like there's some some mixed messages in terms of overall level of activity and I guess tell some discussion around.
So.
Pricing concession dynamics. So you gave us we'll get color on Latin American what to expect in Ecuador. So just hoping you give us some some of that same kind of color in context on the middle East.
No. Thank you so I think the middle East.
Activities is.
See India, India, a unique mix. The reason for this is that as part of the Opex plus commitment and the compliance a their web decision made during the second quarter for several of the National company operating in middle East to contain the activity and to a and to reduce activity including.
Rig activity or a little less activity during the during the fourth quarter. So this is impacting civil country and vascular sorry, so the number of rigs that a this study was operating at beginning of the year compared to weigh. These operating now that we'd be more than 40 rigs down from January to June and overall.
Nine or 12, a re possibly we go down in the fourth quarter. So no doubt that Asia decline by the effect of the transition exit rate from from Q2 as well as some further contraction of activity in the fourth quarter, that's true for the country.
So depending on the exposure you have in middle East.
It can be a it can be a a significant so it can be offset in our case.
Offsetting this by a gain of activity oil shale in a specific Qatar and Kuwait and as such the overall outlook for some middle East.
He is relatively flat on a sequential basis well indeed, the underlying he got PBT sequentially will go down 6% to 7% across the region.
But depending on the on the so yes, the activity is going down sequentially, no doubt and and it will not a it will not be collected because of the this you don't have lots. We go back plus agreement. He installed at is still the 1.9 billion by cut this was already factored when those activity cuts were.
Decided and antibiotics that any any any impact on this so yes mix down however, depending on the market exposure. We are we in our case eyeball to hold hold all our topline relatively flat that context.
Okay, that's great and then my follow up.
He made a reference that given the cost.
Hostile dynamics execution, and so on that you'd expect.
Operating income margins in EBITDA to improve obviously in the third quarter, but it seems like theres going be built in momentum in the system that could carry over into the fourth quarter. Even if there are some seasonal decline in revenue. So just wanted to kind of test heads my theory on that to see if that if that's true and then.
As part of that was also curious as to what business segment do you think has the best.
Well show the best improvement in an EBITDA margin.
Through the second half of the year.
Good good question I think the first we do confirmed that our ambition is to indeed on the flat outlook absent of offer significant setback that would come from a from a a reversal of the other pandemic situation, but.
And considering the forward looking there will be some seasonal effect. So it's very early to give a to give a a perspective on the topline evolution from a third to fourth quarter, but assuming that the current.
Directional a soft landing of it activity continues I went into the fourth quarter I would expect indeed this a these benefit to carry through and this a this margin expansion to be consistent and two stiller tested old both on the EBITDA and from the operating margin in the fourth quarter.
So that that's correct and I think we are supporting this.
I don't think we are in a position, where we can project and we want to detail and give guidance on the business segment outlook beyond the Bill next quarter, we expect them to two indeed, certify and expand margin next quarter.
But I think to go beyond that there would be some.
End of your effect that should twist as some of these some of the full through but overall on a global basis.
The company never this is what we're expecting.
That's fair I really appreciate color. Thank you.
And next we have a question for line as David Anderson with Barclays. Please go ahead.
Okay, I have a bigger picture.
Good morning America picture question for you.
What I want to ask a quick question for some near term, particularly around the middle East.
You talked about mix being being an issue there but in terms of the rigs going down is it mostly oil I'm. Just curious if you can you talk about the mix between oil and gas is gas still kind of largely maintained their and secondarily is there much impact on this on your LS teekay contracts at all.
Get into that and I'm just wondering if that's what that has any impact there.
So the first Moshe during the first quarter second quarter been or museum on oil.
However that being some side effect on gas because a beach addiction, so budget constraints.
I have led to have you kind of activity in Gaza sweating for whats give you specific I'm sorry.
The guy that SDK compact indeed have reduce a significantly I'm not talking about the commercial for the commercial on gas.
Operation Flak FICA cultivating rigless operation and this this has reduced June you turn you flow and this will possibly rebound, but yes. It does affect that first the drilling.
And is to get by contrast, a was unaffected.
Probably because the performance of those are those investigate we'll talk the differentiated and a there is a mix of oil or gas 60 gait training compact and both were actually sustain and I've not been impacted at this point and we don't expect you to be a tube attributed case, so that should just to give you the but of the.
That's great. Thank you very much. So my bigger picture question is sort of going looking back in history here a bit when we talk about the cycles. It seems to be 1986 is kind of the clear parallel to kind of what we're going through now now in terms of magnitude, but kind of how we got here a lot of respects.
Now you started Schlumberger 1987, and just like now somebody was going to a pretty major management change at the time, but as that cycle slowly regained its footing Schlumberger really accelerated our the downturn set the company up for another decade success. So my question is as you look back at those days in the late eighties early nineties and I'm sure you studied your.
Sensors during those times I'm I'm, just wondering kind of what are some of the big lessons you've learned about how to position the company what to focus on and really I guess, what are the kind of what will it kind of the keys to success back then and that will happen that youre thinking about now as the cycle resets.
So first I'm not old enough to come up on 86, a boundaries. So.
So no Dave I think if we if we step back I think the industry as a proportion to go into crisis and rebound. So no doubt that the this industry, we engineer or innovate its way up at current prices no doubt I think the cockpit seek Don do you have a side of the cycle will be.
Front from what we have known the last 10 to 15 years, and I think capital efficiency capital discipline efficiency cost.
Offset is it really would be the prime element of this conversation. So we're not talking about technology, we talk about technology that impacted performance.
Costs across the lifecycle, a that impact efficiency, hence the fast adoption of offer digital will be the transition. So when you look back on class. Okay. The success. We had historically was clearly on expanding our international franchise and being the service company could.
Create value and fine I don't cabling reserve and had developed this was up everywhere in the world in not in any condition I think the game as change.
It's not about a funny new supply is produced is supplies are lower costs and I think.
On the occasionally would be short cycle a extraction of the next the next up occasionally we'll be funding to the next ads on page offshore deepwater a large basin and technology will always make a difference, but it would be focus on performance impact efficiency.
And and the and this would change change again the signal. The soon aspect I think and digital you see is part of this changing the cost of service delivery judging our efficiency a a factor the civil aspect is I believe.
Good grief that industry is recognizing and we are having better engagement today that maybe we had in the but of course, a necessity to integrate and partner across the supply chain.
And supply chain across a on the on the SEBI side and form supply to operator G.
Your line in partnership that will consultant and a and Kate.
The game change, we need because we need to transform as an industry, we need to find a way to extract just capital efficiency by Sanofi position by changing the way we operate by transforming the way we did outline a Wi Fi operators and the cost the service industry. So partnership across the supply chain too we still.
Changed capital efficiency across the lifecycle and the technology that how differentiated basin focused on performance and focus on lowering the costs associated with this is what I think will be the winning factor in the future.
But I would also imagine the R&D spend is critical as well right I mean, that's one of the things I've known.
The decades.
Oh.
Yes, as I said I think the industry, we innovate is way and innovation will come from the way, we reinvent ourselves, including this partnership this transformation operational transformation, but obviously there will be a very key element of our technology, we'd have to invent a the next the and continue to lead on our digital.
And strong content and invent the the technology that will transform a passionately the performance of the asset the for a far customer step change the efficiency of funding oil and a and automate doing operation So that would come through technology investment and.
No doubt that we continue and reinvest into this to make it happen.
Much appreciate it thank you.
Welcome.
Our next question is from Connor Lynagh with Morgan Stanley. Please go ahead.
Thanks, Good morning.
Good morning color.
I was I was wondering if you could sort of frame some pain from your I think the the pace of cost reductions and in many cases structural cost reduction to surprised a lot of.
Observers of the industry and I guess, what everyone is trying to figure out is how sustainable are how scalable.
These cost savings are.
So if you could characterize the 1.5 billion of cost savings are you thinking of your business as able to reach the same revenue levels. As previously are you not interested in reaching the same revenue levels that you had in say 2018 or 2019, because some of it was so returns dilutive how do you think about b.
Ability of the organization to respond to higher activity levels, if and when we get there.
First the color I think we are true allies and I think this realization has been across all industry that I think we're transitioning into new a new a normal and the normal means that the market for the foreseeable shot down would be structurally smaller in size. So I think we have to make that validation what are we put it twice.
The 530, 35% smaller in size it depends on the on the region on the business, but I think that so how do you see that leading us. So I think that was the first and foremost realization. The second one we have realized enhance the decision that we have made so those are sort of company to adjust and aligned with this new reality and to right size our structure and.
During our support structure to account for this this doesn't set up to as I'm not ready for growth, we absolutely ready for rule, but I think that we believe that the transformation we've gone through.
The efficient capital efficiency also see efficiency that we have enabled in the last the last three to four years and the digital transformation. We are going through now operation today, we create a the leverage that we need to add a future growth at much limited much more limited resource and or.
Capital needs in the future. So I believe that the sittercity the capital efficiency.
We play or now this being said, we'll be very strict on our capital structure parameters, such indeed made the right choice to not deploy capital a and resource when we believe that return on up to in place and I think we have started to do this and we have successfully in doing this and we continue to do so but at the end.
We grow a the recovery is on the horizon, one and as it recovers, we'll be ready with a different shape a different structure you company beat in the North American market, where we did not changing to an asset light technology access model and scale to feed the approach or internationally well well more for.
Yes on the on performance and we are getting success out of this and will accelerate our digital transformation. So yes, we will and we believe that this structure will be to giving us.
More more flexibility as well as a we love the the core digital and Paul submission to the ability to flex.
We found a term at a at a better income models.
Got it but that's helpful. I guess I would extend basically the same question.
Your point, you were making which is a lot of the things you're doing will make the business more capital light.
Is there whether you can frame for people, how the capital intensity or the capex needs as a percentage of sales how we think of it.
Could look on a go forward basis relative to what we saw in the previous cycle here.
I think we have been and 5% to 7% as a guidance a that we are being consistent with and I think.
That's a we'll be able as the market return to you.
After completing some of the transformation for asset light and Tainos access to continue on the on these 5% to 7%.
We are comfortable.
On this and and that's the guidance we keep.
Alright, thanks very much.
And ladies and gentlemen, we have one final question from the line of Marc Bianchi with Cowen. Please go ahead.
Thank you.
Livia you mentioned.
Good morning, you mentioned, a soft landing for international in third quarter.
Yes.
I think there's a lot of questions from investors about budget resets and what we've seen so far internationally. This year and if there is incremental risk to 2021.
Are you comfortable saying that absent.
Seasonality that we usually see in the first quarter.
The international has bottomed in the second quarter of 2020.
It's too early to say Mark I think what I'm, saying is that the the for this year the effect of the budget adjustment and the could read a disruption that are aware did traitor the significant decline 22% decline in the second quarter.
This to condition excessively seeding and subdued in as we go four wall. We don't anticipate significant further budget cuts at the current base a this however, it's too early to say what are the consequence on the beach at the sitting in a in 2020.
One.
If the market was a if the market was indicative of a slow but steady recovery scenario that we according to your many of the analysts the are you and others to indicator and exit rate at 50 or 60. There are in a in 20, a sort of Brent in 2021 of you see this will be certain issue.
Both steady 2021 compared to edge drew on light of activity internationally, but this is too early to say and I think would have to wait a the budget cycle and also a abuse the three to four months of more economic.
We go reopening mix pandemic containment to judge what a 2021 demonstrably balance could be and what the consumption for the budget will be in 2021.
Okay.
Maybe following up on that and that thought about 21, if I sort of take the the run rate level of EBITDA that you have here, it's about 3.3 billion and we've got another 900 million of cost savings that that should be realized youre kind of on a 4.2 billion dollar annualized rate.
As you looked at 21 understanding there's a lot of uncertainty what would you say are the biggest factors that could be driving that higher or lower.
I think Oh, you see the.
The pace, if I could make recovery the anticipated demand the demand a a supply balance and the repercussion will have on a convenience of the operator to investor invest a thing is the major factor that will reshape the the turnover of 2021. So again, if it is a a run rate of which two times to we'd expect.
Sustain whatever we produce second half and to multiply by too that the that is correct assumption, but again the risk I think comes onto the bonds supply more than anything as a north America is it'd be the for a while back out and we don't expect these to be a significant yet, but he will be up most likely as a slow.
But steady recovery, but will not come back to the Hay days, a so I think overall I think you you have the gallons, but a factor ease a predominantly a the pandemic outlook and the demand supplied impact on advanced by prediction and we cannot come on Mona Lisa at this point.
Fair enough, thanks, very much I'll turn it back.
Thank you Mark.
So I believe we are the it's time to close so to close let me let me leave you with a three point.
Firstly, our Q2 performance reflects the decisiveness and death of our cash cost adjustment and cash preservation actions.
I'm very pleased with the operational performance international margins resilient cash reserves and the uptake in digital during the quarter.
Secondly, where resetting the company structure to support our performance vision and to align with the new market reality and as such we have initiated a clear pass through still margins and returns performance with the bulk of the security smaller market.
We expect these two should we be doing your second half Uppsala for said back in economic recovery.
Finally, our performance, how digi with digital and sustainability as imperatives and capital structure and FICO Basin technology as performance factors, we cut the transition this new in Israel escape and we support the return submission, particularly as the future eco repeat whats towards international markets.
So with this and now before I close the call I wish everyone and I wish everyone is safe and happy summer I would like to thank.
Simon Farrant for nearly 33 years of service.
He has elected to take an early retirements functionality.
Simon has been a very familiar voice and faced throughout the last six years 26 quarters in Israel as Vice President of Investor Relations and of course that these Unico Commission to both from Eric and Investor community will be greatly missed Simon we wish you and your family.
All the best Android initiative.
Thank you live yet.
Andy Matthew Emedia, who most recently was the sub Sahara Africa Geomarket manager will take over from Simon effective at the end of this month.
I ask that Youre welcome Andy and extend to him the same I level of support and position our engagement as Shelby Salmon welcome Andy.
Thank you.
Excited and honored to take on its role and also working very closely the old.
Hi, John Culver plant.
Simon well. Thank you very much a olivier it's been an honor to serve as the head of Investor Relations as you say for the last 26 quarters.
I wish my good friend and able to bat in taking over this Roe.
Thank you operator in a classical.
Thank you, ladies and gentlemen that does conclude your conference for today. Thank you for your participation in for using 18 to teleconference service you may now disconnect.
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