Q3 2020 Schlumberger NV Earnings Call
Ladies and gentlemen, thank you for standing by and 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.
As a reminder, today's conference call is being recorded.
I would now like to turn the conference over to Vice President of Investor Relations N D. <unk> Amazing. Please go ahead.
Thank you Cynthia good.
Good morning.
Welcome to the Slumber J limited headquarter Twentytwenty riding school.
Today's call is being hosted from Houston.
Moving to slide <unk> Limited Board meeting held earlier this week.
Joining us on the call well, even at Busch <unk> Chief Executive Officer.
That's definitely good she find.
Chief Financial Officer.
For today's agenda will you be able to start the call with his perspective on the quarter and the world.
The updated view of the industry Michael.
Which the fried will give more detail on our financial results then we will open for questions.
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 I needed. Thank you filing and our other it's easy 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 third quarter press release.
With that I will turn the call over to many of you. Thank you Andy.
Ladies and gentlemen, good morning, Thank you for joining us on the call today.
In my opening remarks, I would like to focus my commentary on three balls first oh filled quota operational and financial performance next.
Next pullbacks, we the demolition of I'll call. It the GE unfilled updated view on the NIM near term business outlook. After this stuff I would provide greater detail on our financial results.
In the fourth quarter, we have the opportunity to demonstrate the significance of the materials, we have taken over the last few months and.
And set the must go up a phone.
True topline was he jumps monitronics function.
By maintaining a strong cash generation to Mexico.
You know what I'm doing activity 12, I'll feel codell signals for about four months was exceptionally strong yet to go.
Yes, again, we continue to maintain benchmarks of safety and service quality you know operations.
See cultural miles greentech function rebounded by more than 300 basis points for both IBT and EBITDA and free cash flow was solidly positive.
The slayings for margin expansion and free cash flow performance, even more impactful in the context of the slide topline decline and the exceptional items during the quarter.
I would like to thank the entire system as a team for these will not couple Bucks a month and 12 excellence in execution.
These results represent a defining steps in the reset of <unk> earnings power at the trough of the cycle and set the stage for long term outperformance.
Starting from operations in the fourth quarter, we maintain benchmark integrating about four months, we view about your improvement at 30% in that you see incident frequency and 34% yeah liability.
Operational integrity remains an hour shrinks force from LG and the foundation of about four months how did you.
Our consistent so you did read around civil letters of Commendation, former customers and he is the basis of multiple new contract awards, we call it in the quarter.
Financially, we posted high single short kit ducs approaching margins more than 20% EBITDA growth and positive free cash flow. Despite the suit on specimens and reduce what can give you the rudi's best <unk> Walter.
This wasn't security sets us on the bus to our intermediate goal of restoring two dozen 19 EBITDA margins before the end of 2021.
Now, let me turn to outside the <unk>.
Oh lets structuring program is progressing well and we are on track to realize most of apartment on structural cost savings as we exit this year.
We also began to transition to all of you know customer line structure comprised all divisions and basins.
Designed to support the basin specific innovation, that's really sort of device remote its position as the performance, but they'll choice.
Next in North America, we achieved key milestones on our skin to feedstock Digi, we have two transactions that it's almost the high grading of football for you why lowering capital intensity and volatility then you get your transaction and the real feel divestiture.
The closing of this transaction will not only enhance it'd be dumb out you know the global live what would focus you both lower capital intensity and accelerate the Pos do a financial goals for North America.
Looking ahead that the benefits of these cost to execution, we sit to significantly improve the company's future operating leverage and aftermarket activity recall goes from the control we have double onshore to restore EBITDA due to two dozen Mach 2019, Mako of $6.6 billion.
Recurring only half of the year on year revenue decline.
Our befallen strategy also focus on rising of golf, which includes digital and push on recovering the industry is rapidly embracing digital enablement and shifting capital investment towards maximizing you push on recovery from existing assets well. These two industries sheep's converge in its sounds where did you told him.
Correct.
We put it on a recovery she has a unique opportunity to deploy the full power of our industry digital platform and don't expect these spending was up on production for the benefit of our customers.
The Best example of this was yeah, because if I go on edge AI and I would see solutions you know if U.S. project in Ecuador by connecting fee to keep them to those clouds and letting predictive value at the edge, we boosted pollution, 40% on I got connected wells why significantly reducing fee crew visits to these wells and as such.
Good thing, it's just the exposure and on Vimal pulling back.
This created the revenue and margin on the nasal Ts project, where we capture the value directly and it's just an example of what is supposed to be that scale when you use.
When we use the power of the industry do you still platform to blend all the way around software to enable people wherever they are located to make performance impacts with digital.
In addition, we continued to expand the reach of our digital platform as demonstrated by the I.B.M. ahead that openshift agreements, so going there being adoption of our platform around the world and Pops Godaddy with an overseas.
Yeah. Walter we have also secured notable subsea and that's surely complex in the Gulf of Mexico and in the Middle East, which will result in the growth of our installed base and greater exposure to pollution rigor. We got makes on Opex as home platform for the future.
Finally, we continue to develop all in a new energy portfolio, which we pulled back at origin signals, you're not sure agenda and the creation of a joke tell more proactive among company, which complements our low it's Joe Daimler venture says your synergy this.
This exciting venture group is on a mix of new unique opportunities for us to measure to create a differentiated market position through the energy transition in power.
Well, we continue to develop I been used to contribute to the decarbonisation of oil and gas operations leveraging of technology expertise and execution platform to reduce on climate can impact, while helping our customers reach down by multiples.
Let me take a few moments now to talk about the outlook.
In the short to medium or rise on the market uncertainties persist as it could make recovery remains for Jive.
The pace of the more we got we could possibly slow pools and as a result of civil and wave of phonemic outbreaks or I don't want any control measures.
Similarly to the first quarter, we also faced risk of lingering.
Okay 90, your question or disruption internationally as we until the winter season in the.
In this context, we continue to focus on what threeq on pork and the rack promptly if necessary.
No upside to propose into more rigor, we Ohio, Cobi 19 disruption the fourth quarter activity, we'd actually extended the trends expands as we closed the fourth quarter.
With a continuation of a modest activity uptake in North America, and the stabilization to was it steady activity internationally.
Albeit with visible seasonal valuations.
The combination of which.
Shifting into in about flat outlook overall for the quarter.
We can godfather, the preventing uncertainties make it much too early to call.
I will directionally and absence of a slowdown in the pace of good economic recovery, we anticipate or what activity to consolidate gradually doing 2021.
In line with the most <unk> most recent projections, we see that the conditions did exist to rebalance the abundant supply with improving demand recovery supported by couldn't make stimulus measures and continued to supply the shipping from the major producer.
It's a medley was entering into a busy productivity rebel.
North America land is expected to continued subdued but go green trucked and drilling activity towards pollution maintenance limits internationally as demand recovers pull on short cycle supply would result in an active each injection.
An active each injection.
This being anticipated, but most operators currently evaluating options to west though activity.
Having shared our view on the outlook, let me know and overall to stiffen, we'll talk more about our financial results. The fun. Thank you.
Thank you Olivia and good morning, ladies and gentlemen.
Fourth quarter earnings per share excluding charges and credits was 16 cents. This represents an increase of 11 cents sequentially and a decrease of 27 cents when compared to the same quarter of last year.
During the quarter, we recorded $350 million of pretax restructuring charges.
These charges primarily relate to facility exit costs as we continue to rationalize our real estate footprint.
As a result of these charges our pre tax operating income will increase by approximately $15 million per quarter going for Walt you to reduce these and depreciation expenses.
Overall, our first quarter revenue of $5.3 billion decreased 2% sequentially.
Pretax segment operating margins increased 355 basis points to 10.9%.
More importantly, companywide adjusted EBITDA margins increased 371 basis points to 19.4 persons.
As a reminder, all full Eurtwenty 19, adjusted EBITDA margin was 20.2 doses.
The wells, we are well on our way to restoring our pre crises EBITDA margins of 2019 despite.
Despite the severe revenue reduction than we have experienced this.
This will be achieved through the combination of our restructuring actions and the high grading of all portfolio.
As a reminder, our restructuring program with permanently removed.
$1.5 billion of fixed costs on an annual basis, we have.
We have achieved more than 80% of its cash savings as of the end of the fourth quarter, we expect.
We expect to complete most of the remaining actions as we exit the fourth quarter.
As it relates to the high grading of our portfolio, we achieved two significant milestones this quarter we did.
With the signing of an agreement to divest our north American low flow artificial lift business in a cash transaction.
Followed by an agreement to contribute on Wednesday in pressure pumping business to Liberty oilfield services in exchange for a 57% equity interest in the budget.
We received antitrust clearance for both transaction and we anticipate each of the closings to occur on before the end of the year you did.
It is worth noting that both transactions will be accretive to our earnings in Twentytwenty one.
Let me now go through the fourth quarter results for each segment.
Fourth quarter results characterization revenue of 1 billion decreased 4% sequentially, while margins decreased 90 basis points to 16.7%.
These decreases were primarily due to lower sales of Westerngeco multiclient seismic licensees in North America offshore.
Drilling revenue of 1.5 billion decreased 12% sequentially, while margins were essentially flat at 9.5%.
The revenue increase was driven by an activity decline in us land, where the rig count dropped significantly.
By end, we've covered disruptions and customary budget adjustments in several international Geo markets.
Despite the revenue drop margins were resilient as a result of cost reduction measures.
Production on revenue of 1.8 billion increased 12% sequentially and margins increased 11 percentage points to 12.6%.
These increases were largely the result of a resumption of activity in our.
Our EPS projects in Ecuador, following last quarter's production interruption caused by a midroll and slide.
Once team also increased on higher fleet utilization while.
While profitability improved across each overall completions artificial list and what is obvious is pro declines due to cost reduction measures.
Cameron revenue of 1 billion decreased 5%, while margins decreased by 162 basis points to 6.3%.
On lower on one subsea revenue in Asia, and Europe, as well as lower surface systemic we've been sales in North America.
Now turning to our liquidity I was.
I was again very pleased with our cash flow generation during the quarter, we generated 479 million of cash flow from operations and to.
And 226 million the free cash flow.
Despite making 273 million of severance payments.
This performance confirms that our cash flow generation capabilities remain intact.
As a result, we will generate excess cash once our restructuring efforts are complete.
And therefore be in a position to de leverage the balance sheet.
We ended the quarter with total cash and investment of 3.8 billion on net debt at the end of the quarter was 15.9 billion an increase.
An increase of 149 million compared to last quarter, but down almost half a billion when compared to the same time last year.
During the quarter, we spent 200 million on Capex.
And invested 28 million in MTS project.
Our total capital spend 2020, including if he isn't multi client.
Still expected to be approximately $1.5 billion. This represents a 45% decreased.
As compared to 2019, mostly coming from lower Capex in North America, and reduced investments in EPS projects with.
We took further steps to strengthen the balance sheet during the quarter, we issued 500 million of 1.4% notes due 2025 the process.
The proceeds will be used to repay 2.2% notes that mature in November we also issued $350 million of 265 for some nodes do 20 felt.
The proceeds were used to be down commercial paper borrowings.
Finally, we ended the quarter Weve available liquidity of 10 point they'd billions.
Before I conclude and just as a reminder, due to our corporate reorganization. We will report our results on the basis of the four new divisions, starting in the fourth quarter.
We are working to provide the historical restated financial information based upon the new division structure and expect to public service in November.
I will now turn the conference call back to Libya. Thank you Steffen, ladies and gentlemen, I think we are ready to open the call for questions.
Thank you and ladies.
And gentlemen, you May press, one and then you all.
A question or comment.
Our first question will come from the line.
James West with.
Evercore ISI your line is open.
Oh, good morning Olivia.
Morning, James.
First just a statement for me I really appreciate you.
Clearly, stating the goal of returns above your cost of capital or value creation as well.
As we see it because most of the industry is lack that.
That progress in the last decade, or so so thank you for stating that as the clear goal hamzah.
The the.
The first question I have for you is you taken several defining steps towards the reinvention of slumber J. So for use in this crisis to your somewhat advantage could.
Could you talk maybe about the steps taken and then what we should expect going forward.
Good Great question James So thanks again, indeed, we are set to you.
Continue to execute our strategy for improving our return above cost of capital. That's a foundation, okay, right and we'll do that in several ways cash flow margins.
Margins and discipline on capital. Obviously, so you have seen that we are not waste to declare this as we could say taking the opportunity to restructure our organization to reset to the new what we expect in a normal.
And if you add on that in the.
In anticipating that the market will be structurally smaller, albeit it will be defined by new attributes one of them is the the basin attributes, where we believe rationalization become more critical hence the occasional formation structure to support our clients in that they seem to outperform in every basin and that's for sure.
Since our digi and that is in light there. The segment. Obviously a transition is digital I think digital is happening everywhere.
Your fees.
Operation in.
In in all aspects of our workflows and we believe that this is a transformative step that we are ready to support and last year, we set very high level I believe that.
Police on recovery will become more critical going forward as the mature assets will have to be there.
Return on mattresses will have to be improved at the same time the energy transition from gas.
Technology midstream as well as the transition to new energy I think this will give us the digital the pollution recovery then as you transition starting with gas will give us the amount of growth that will then leverage our new operating platform with the division basin as you have seen restructured to give us the button.
Did you do much expand our margins and reach and exceed.
Hey, Tom about above cost of capital that's that's what we estimate to achieving gems.
That's very good color there and then on the margin expansion.
Comment you're sticking to the getting back to the 19 EBITDA margins by the end of 21, what needs to happen to to drive that do we need market growth is that the cost outs you've already taken what are the key things we should be looking forward to ensure that that happens.
I think there are three elements in the first and foremost on one that had the most impact to date in the quarter results is the restructuring we have done when we adjusted our comment on structure and viable cost to the new normal into the new level of activity as we foresee having this as a as a senior.
Since taking on price on refining impact on our on our return margin expansion. So the second factor is is the contribution of our Cartesian North America that aims at the high grading our portfolio and taking steps to make sure that we retain and could you invest in the portfolio, where we believe we can differentiate and Katie Turner.
Both our operational and third is the leverage of our international.
Footprints, so when you combine the.
The core measure on structural adjustments that we have done to lift our and reset our earnings power.
The actions, we have taken to enhance significantly our margins not semi carplay North America and into the international mix leverage. Although this this will combine to elevate and gradually build our EBITDA margin to the to the 20% of our EBITDA of 2019, and we don't need much.
Growth to achieve this.
Perfect. Thanks, a lot of it.
You're welcome thank you.
Our next question comes from the line of Andrew.
[music].
And your line is open.
Hey, good morning, guys morning.
Nice quarter.
So a little bit.
James This question around the 2019 EBITDA margin.
Would you say number one digital.
Further accretive to that 20% margin and the return to that 20% margin 2019, and do you think those.
Margin normalized EPS lumber here this cycle or could it be better and then finally on that as you said in your remarks 6.6 billion and EBITDA on half the revenue certainly above consensus estimates for 21 and 22.
Further color there on a timeline.
Okay. Okay. So France, if question and let me thank you.
So first on digital readout Kettle Absolutly executive today, it's actually used to more of a I think it will be accretive in the future.
I can't even the future at the step that is certainly putting.
Our margins up and I think what were looking for the exit rate is our growth CAGR. So that it is actually did not in in the future.
The larger scale. So these will ease and will be accretive on the way forward absolutely.
The second question you ask is.
On the.
On the EBITDA of 2019, if I understand correctly, what you what you asked for Angie.
To reiterate.
So yes, I think we've got.
We are clear on our ability to deliver this EBITDA margin improvement to 20% above.
Both in the short term and a and the mix is the mix we need as as I said, the and commensurate with that Weve gems is very clear discrimination of international our restructuring and the and the international exposure that we have that are greatly accretive students.
Anthony you asked a question about when.
When and and now we will go beyond this.
Our mid cycle margin ambition is a is evolved at that level. We are at the trough at operating already very close to this 29 gene having operated or reset of our margins. Our expectation is continuing to grow and expand again, beating our international franchise drilling and accelerating.
Our digital and being the full form. This will also continue to execute on our capital discipline capital stewardship that will guide our portfolio and were resolved some of the feedlot stunning underperforming business units. So you combine growth internationally and the power of digital and our discipline on capital stewardship.
Been addressing our underperforming contract you had the receiving to expand the margin beyond this 20% and and you can make the math I think we would expect the need that we.
We have to have the revenue.
Coming back from 2019, we would expect to be in a position to reach or exceed this a dollar EBITDA contribution. So I think when is this happening.
Sometime in the future not 2021 clearly.
2022 will be the beginning of the cycle of international expansion that survey likely and after that there will be some.
Some time, but we believe this is in a insight and that's that's what we're working to towards.
Okay wonderful that was very good answer thanks, So one more on Liberty.
Maybe you could talk about the transaction a little bit more detail the magnitude of the accretion opportunity.
Access to the customer and well site without having frac and and the determination of what your accent liberating our medium term owner or a long term owner of that share.
I'll, let Stefan on so Simon I will I will answer on the on the customer engagement. Please define on the transaction.
Sure.
We are drilling progressing quite well on the integration planning there.
The good news, we are identifying fluid process additional synergies and opportunities for technology collaboration but makes vis a vis combination even more compelling than we initially contemplated so the.
We are quite happy with.
We've been partnering with Liberty we.
We believe is quite a lot of upside potential in the company in the combined company as the company as the synergies are realized when the market starts to recover also we will benefit from the North American.
Conventional recovery as our equity stake we continue to appreciate and we will also leverage our technology Alliance with Liberty. So it is pretty much are in that context to talk about monetization, considering where we stand in the cycle, but that will of course remain an option over the longer term, we have not set the timelines for obvious we.
Not set a target price but.
But it will always remain an option.
In terms of accretion we've stated it will be accretive from a from day one so.
Going into Twentytwenty, one it will be it will be positive force wrong or areas.
And margins overall.
Yeah, I can only reinforce that I think our value proposition devotion of liberty on the on the markets. We saw existing customer I think is is and upsell very strong with this platform as a pure play the largest pure play Fi company, but we.
But we are putting in place.
The country.
Contract and service level agreement across both company to cost license technology and to create pull through so that we can extend a deliberate.
Liberty.
A work flow and the the value proposition well site and we can pull them on some of the contract we have on what a constriction over complex, where we participate across an array.
Around the cycle provision so clearly for both they bid.
But if you see the beneficiary on onboard.
Great. Thanks, I'll turn it over.
Thank you next we will go to the line of David.
With Barclays.
Your line is open.
Great. Thank you good morning, Olivier so certainly that would occur.
On a core digital you've talked about digital being a core part of Schlumberger growth strategy and your stated goals to double the revenue in the medium term cure.
Curious kind of where acquisitions fit in that part of it as part of the goal I ask because back in the Ninetys of course patrolling eclipse were crucial to your success for the 2000 and still big part of your offerings, but more recently, you've announced kind of partnerships and venture backed companies are involved and I just like to understand a little bit more about your digital growth strategy as you build this.
Business out.
Yeah. Good question, Dave. Thank you I think first and foremost I'll stop there.
Our strategy revolve around the digital platform, establishing additional platform for industry both from the.
In the zoo sounds subsurface side.
The size and building on that.
Desktop offering today and drilling up on our on our market a market strengths and establishing with what we do for you and open platform formation Weve data ecosystem shared with industry and offering the actually as the foundation for this so we believe that this transition to the cloud we Samantha our desktop leadership position we have today.
And the expanding trade growth opportunity with new.
Position similar to the Sharon's similar to the Suncor see me now to the to the Woodside transition that we are doing with the Dixie core expanding into into the cloud. So this alone is a growth revenue.
The second one is is digital operation as I recall, it and I think it extend del fee to the drilling.
All three pollution space, but also we have extending we're bidding stunning and using the concept of digital platform to also introduce Wattup will go up a gateway and the platform that offers opportunity to plug AI or edge application on equipment and.
On equipment and I think we have seen two example of which we described in todays press release earlier today.
Earlier today and I think this is an expansion so that's the seven axis of.
Of.
Expanding beyond the core beyond just sounds and explaining to operation and the third I think is the domain of.
AI and offering services for our customers to extract more form that will flow a cost.
Across the cost and using.
And the level of our platform not necessarily application, but using the platform as a as a basis for carrying value to their own IP to their own integration capability and where we act as a system integrator and we act as a as a support for that for now I will throw. So these are the of your growth. So we'll continue to make a partner.
Ship as a basis for building this platforms.
Platform stacks, and we will and when as appropriate we believe that we have if we believe we have gaps into our bringing in operation or in a zero sound. So in AI, we make a bolt on acquisition as.
Bolt on acquisition as we call it a twoq Superman.
Two Superman not to comment on this or that we better response to this and expand in new energy like spending to the gas midstream players on both a using the same platform.
So Olivia I think one of the struggles for investors is taking digital from a conceptual idea into real life practice and you mentioned a glorious several times in the release today and I was wondering you could talk about two things if you're talking about our Gora IBM Red hat agreement kind of two separate things here.
Gore being more edge computing, driven maybe you could just talk about kind of what is the best application, where do you see that fitting in terms of your business like what's the most obvious application, where you can really make a difference and secondarily on the IBM red hat, you've targeted NRC as being the customer. So what did what is that bringing to the NRC customer.
Okay. So first I go on.
Simply said.
How big is the ability to.
To bring on every piece of equipment on the platform on on the rig and the ability to connect a this piece of equipment to the cloud onto our platform and yet offering.
At this point at this age and open platform, where our partners can provide and can plug the application AI application typically that will add value to these two data feed. The perfect example is what you have seen on the on the patent application, where we have not been developing this video video.
Surpassing analysts' is still one of our partners are just deployed their video a tool onto our platform and connected to the camera and which serve as a good way back to the to the cloud. So we just provided.
Although the platform that our customer licensing and.
Starting on the on the equipment and then down partners, our partners are creating value with a with AI routines.
Biggish, an IDH that connects to the cloud that's what people like in a secure way.
Okay Thats Openshift simply said is an ability to provide a multiplicity of options for cloud deployment for customers that offer every cloud deployments on premise and public and the address the concern that some of our customers in some country where.
I think that they cannot X.
Export that that out to the public clouds, because it is a it is a.
That does it present that I really don't see issue or they believe they need to control and have in house premise cloud infrastructure for these two solution, we provide a true openshift and ability to deploy their feet on on premise cloud infrastructure or Oh.
Cloud that are not to be cloud and addressing a lot.
The market that we cannot rest today, it's about it's about a 50% of the market today, 50% of the country that don't have all do not prefer to use a public clouds for their hosting the data that we're looking to this swap unlocking a significant part of the market.
Thank you very much.
Our next question comes from the line.
RBC Your line is open.
Hey, guys. Good morning, Alexei warning how is everyone.
Yeah. Good morning. Thanks.
Olivier.
I wanted to congratulate you and your team on a very fast.
Difficult situation I know you highlighted digital.
Back when you first joined in September and then reiterated.
Anywhere and it sounds like its or anything.
And so for you so kudos on that on that quick pivot.
Thank you Mike.
My question.
We've seen a lot of.
Commentary out of the major oil companies about their ship the budget.
You know thats, a fossil fuel dynamics to more green renewable.
Renewable and so on and so forth with BT, probably being the most radical in that process.
Trying to connect the dots here, but it seems like the.
The clean energy business that you established back in the spring.
So I just want to be very well positioned in line with the potential future spending plans.
So with your existing customers. So I was just wondering if you could give us a little bit more insights on how you view potentially the whole energy business evolving over time.
No great question, Kurt I think you'll see we see it's not on yet a trend that we want to capture of our existing customers I think if you see some of our customer segments.
Positioning into the phone orders energy company and wants to add to that portfolio beyond oil and gas, including some technology and some renewables a in which you also have interest and I think that.
Large what we I realize is that we have a technology platform. We are the inability to deploy at scale a technology, we have a subsurface knowledge. When you combine all of this we believe that we have market position that we can take developed into the the new energy business beat under enabled beat on the energy.
Still edge, albeit on the on Idol Gen and and I think this is a well we are developing adventure today, we are developing it in a geothermal both low heat and deep Joe Camel and Thats, the adjacency our business because it exploits our subsurface knowledge, our drilling well construction and.
Ability to to manage manage heat float a phone so phase two so place and and provide digital platform to control. It. So that's a that's where we're heading a D Andrews and E.
He is very they are interesting for us because it's a huge opportunity battery led by you were dug in deal and adapt revenue. They are one of the new is the green idle Gen or electrolyzer well, we believe we with our new venture Januvia in a position to create differentiated offering in the market to pull.
By the market.
With a higher efficiency.
Hi efficiency and the more more versatile electrolyzer that can see this fall.
40, Gigawatts the capacity that he is planning for 2030 and and foundry I think what we've got.
Well, we'll continue to also look into Ccs, which is again close to our core but not to see us application for oil and gas, but see shipped application you are decarbonize the.
How to abate sector ammonia or SMS for advisors and pollution through a gas and these other sectors that are outside of our oil and gas customers, where we believe we can add value and when you combine all of this this is a very exciting feature on the new energy and we have to keep position today for their own.
We run.
That's great appreciate that insight.
Follow up question would be you mentioned the prospect for short cycle projects.
Hello rate, especially in the international markets when heading out into 2022, and then I know you don't want to get pinned down to any kind of specifics, but I'm just kind of curious how you think about the yes.
The magnitude of rebound and again I have to get too specific here, but just wondering how sharp of rebound you would expect in and maybe what geographic regions. You would think would be the way.
Yeah, I think what we see is that the.
Clearly I think the level of invoice.
Investment that currently going into international is not sustainable I think for the reason I think the the demand supply will rebalance and UK the pool on supply worldwide and I think this will be putting on international as well as the U.S. and North America.
North America, they're not somebody got suffered from a a setback that these cutting a gap in the future a supply so I think the coalition asset.
Okay.
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Can you hear me, Okay I mean.
[music].
There's a lot of feedback.
Yes.
And the feedback has gone thank you better so.
Okay. So I think the short cycle is set to come back first and then long cycle.
The timing of this and the magnitude I think will depend on the you see on the demand the older man the pace a weaker rebase, but what we can say is that customers are really young.
Customers are really engaging and are asking us to be ready for mobilization a beat in short our permit them to make sure that we're not.
Getting in one direction to get capacity beyond the beyond what they will need in the short to mid term. So I would expect the the the low cost.
Cost producer country and on the core Opex plus to be the first to react and rebound when the market will will be there. So that includes be the recycling is Russia obviously.
Beyond that I think.
We are well, we see a short cycle every well China will continue to be executing on their energy strategy. So I don't expect this to be drilling down and then we will see gradually infill drilling a well you see the the shallow water coming back and then there is a lot of society ready to be ARPU.
That will then accelerate back to the board. So I think there will be a sequence in this but short cycle will come back both onshore and offshore and I will come back as certainly as sometime in 2021 and killing 2022.
That's great. Thanks, I appreciate that color.
Thanks.
That.
With Citi.
Good morning.
Sure.
So let me I want to come back to the renewables question.
Several interesting initiatives.
Do you have an aspiration for renewables to be a certain percentage of revenues pick your year 2025, 2030, and just given your scale. What does this mean for Capex and R&D spending and overall, how do you think about balancing the desire to see and what I believe will be here.
Desire to see a measureable portion of your revenue stream, becoming laboratory renewables, while also continuing to drive improved financial performance.
Yeah, absolutely I think it's too early to to quote the number I think thats something that we are working and then we continue to develop a strategy a bit I think.
Well I think I will not get is when we have all the thing is modern winnable and its not intersects renewable but I think is the technology approach, we have and it's not necessarily don't don't expect us to buy wind farms and go after capital project. So that's not a not Titan Titan is to continue to play and regional strengths strengths being a technology being a technology.
He partners for a renewable company being 10 who's your partner for some some of our current existing customers being a technology partner for a addressing new a new economy, such as agile as an economy. I think this is where we would want to be.
You see I want to be this to be a meaningful I want to be at scale and in the next decade for sure because I think at that time, we want to be in a position, where we believe we will be diversifying our portfolio and drilling and then leveraging the growth that is existing in these to make sure that we are having a diversified portfolio.
Let's see the technology portfolio, and a service and technology offering weve solution to this market. So again, it's a it's a long term ambition with shop them.
Investment that are helping us to create market position that are unique and that will gradually being being reinforced and will take a bigger position on the one we believe are the most potential in the coming years.
Gotcha and I, just want to circle back on the 20% EBITDA margin target for next year.
You did about 19% Threeq, what I imagine is like.
Close to 20% ex the to be divested businesses. It just seems that 20% is.
Is easily achievable if not be double next year. So what am I missing is there still some concern around pricing.
Contracts roll into next year is there is some concern that maybe customer spending abroad won't miss that much over the course of 21.
The Washington, we consider the 20% EBITDA margin relatively low bar just getting this week you performance.
No. It's a first is the way we define it as a full year full year targets. We have to we are taking a it will happen before the end of 2021 and believe the trajectory of the year, we forgot you'll recall, we will give us the opportunity to create a full your target that will that will be set at this level or exceed do.
Do we do we anticipate and feel more and more pricing no I think the pricing has been the pricing pressure has been we first for the last six years I think as I commented before I think we have been giving away a and the industry at large has been under pressure for this AD industry. Now is realizing that is so much we can give.
And we are working more collaborative work customers to find solution to element eliminate waste now obviously large integrated compact active competitively priced but we see that through performance through technology and true to a so.
Smarter engagement and alignment for customer well able to to offset those pricing and competitive pressure and a and realize a red eyes.
Margin resilience, so pricing is and will remain with us in this in this in these years to become a possible headwinds, but mostly on large inhibitor composite I believe that when activity will come back we get opportunity to get that to get buys like pricing in the in the white market.
Great appreciate the color. Thank you.
Thank you.
Our next question comes from the line of Sean Meakim with JP Morgan Your line is open.
Thank you good morning.
Good morning Shannon.
So let me I think the energy transition topic naturally kind of begs the question about the.
The outlook for international Peace spending in the coming cycle I. Appreciate your earlier comments on the cadence of how work will come back say next year, but well.
What's also going to be different in this cycle is that your customers have additional calls on their cash flow that are being prioritized for upstream upstream spending right Cesar diverting more capital towards renewables, that's the plan independents and the first quarter cash to their balance sheets.
Just curious how those factors influence your expectation or the international spending cycle and specifically offshore as iOS. These control most of the spend specifically deepwater acreage globally.
Yes, that's a correct assumption I think we we believe that what will happen is that the market, we consolidate around basins position that each of the major on large independent will concentrate on their blessing of basing plays and our our strengths I believe that we have to be smart about aligning we focused them.
Those in those key basins beat around the core assets such as the Exony ingredients such as some of the iOS season in Brazil or in a in a in East Africa.
We'll we'll make sure that we align ourselves with those so that we maximize the uptake of market and position in those in those basins and continue to execute our FIFO basing and engagement with customers to make sure we maximize those position. So that's the first thing we want to do next I will come on that.
The National company are part of the mix and I think a deepwater is indeed, a more domain, where international company dominate and nothing we have they are very strong position, but from shallow to land. A there is a lot of activity that these pool, both short and long cycle bye.
National Company and the in Middle East most of the most at offshore activity is not all of those activities led bye bye.
By a national company and he is going.
Fairly wide and has been more resilient than the land activity. So we will hold on those position and make sure. We continue as you have seen some contract have been awarding these domain continue to pursue this so we we understand that the the market will be structurally different than than what we could have anticipated five years ago.
We believe that the position around key basins and off of a three.
Our strengths from our customers and aligning ourselves with this will provide us the opportunity to capture most of this international growth coming back.
Got it understood I appreciate that.
I wanted to touch on reservoir characterization as well in that segment experienced a lot of volatility in its margins last couple of quarters much more than we've seen historically.
I'm just curious how you characterize the gravitational center for those margins.
The business has cost reductions impacting et cetera, what do you. How do you think that business looks like on a on a full year basis.
Once we once we get through these near term challenges.
I think I will the going I will offer on this is that this market is a is a market where the exploration markets seats and the explosion market is set from discretionary spend and it includes the Midland cell studies, Turkey, I've been a little bit of a swing.
That depends on the season and depends also on the the expulsion. The additionally budget that is available for customers to invest in future exploration acreage. So that has left a little bit of variability. The variability has been bigger in recent time, because the proportionate proportionate a a scale of.
Explosion as as well as reduce hands when explosion campaign comes back which happens every over season and when they discretionary spend on exploration to multi client. This combined to create a strong very strong quarter and but at the base the related the decene wireline and digital.
Sealer assay performing very well.
Uh huh.
Software was going to say this quarter at one of the base you put Atlanta did go a quarter on quarter and enroll as an example, so expect distributor the consequence of a more subjects.
Most of the exposure, we have on discretionary exploration spend and the exploration campaign, a variability that we see quarter on quarter. This is the this is the most of the rationale for this more than any a core issue. We will have in any of the product line that down there now commencing in the future we will not comment anymore.
Our characterization as we'll come out on the new divisions that were set in place and this will be part of it would be digital part of it will be in a sort of a performance division. So you will get more detail on this in the coming months.
That's right fair enough. Thanks Olivia.
Thank you Sean.
Our next question comes from the line of Chris.
With Wells Fargo.
Your line is open.
Thanks. Good morning, first question, just a little bit of clarification, sorry, if I missed this but I believe your your opening remarks on the outlook for adjusted flat quarter to quarter in the fourth quarter.
Fair to assume that that applies at the EBITDA line, So just north of $1 billion.
That's a fair assumption I think we have some.
We have some we have some favorable and unfavorable play a that we believe will balance out and the ambition will be determined 10, roughly the both the the margins and the <unk> and the <unk>.
And the Doral on at about flat.
Okay. Thanks, that's helpful. And then secondly, I wonder if you could just give a little more detail on the progression for the cost savings I guess, you're getting about 80% third quarter should warmer than fourth quarter, but maybe $68 million the incremental.
So we think there is much less than 24 hours from that.
Is that international or Matt, mostly international base, but is there any progress there in North America as well.
So then they'll take this Chris varies yes, we were more of a quite a bit above 80%. So varies a bit less they will be still a bit left going into Q1. It is mostly on the on the international the tail end of it in North America.
It is mostly complete.
So so you so you will see a bit more a bit more push from is in in Q4, but some remainder on going into the first half next year.
Does that answer your question the cost.
Sorry, and just to finish up on that restructuring costs in the past.
Third quarter revenue.
273, do you think those costs would be higher in the fourth quarter.
I think expectations going into the second half so what will the cost savings to be much higher.
Yeah, it's not an exact science well to be honest very the cash outlays, a very very good spread out or it could be a little bit higher in the fourth quarter. However.
The cash flow from operations traditionally in the fourth quarter also increase or so I think we could very well end up with a with free cash flow, including severance still is still quite positive and if everything goes well could even be higher.
Robin into free even where we have higher severance potential.
Okay. Thank you very much.
Thank you Chris.
Thank you.
Our next.
Yes.
Yeah, good morning, owning bill would be yes.
Yeah. Thank you.
At this point based upon the dialogue.
That you're having with your international customers course international on a pro forma basis is going to be 80% of revenues once we consummate one Stan.
But you mentioned a strong customer engagement with regard the dialogue that you're having for international.
At this point do you think international revenues in 2021 are up year over year.
I think the the the way you look at we look at it babies to look at the current level of activity and we use a more or less the second half of this year as a baseline.
Because I think the receptor for international oil company has happened in the second quarter for independent as happened in the second and third and four National Company has happened in the third sort of reset of activity is up in the last six months now we believe that we have stabilized and we have seen it in the last the last.
The last few weeks and we don't believe that the aside from seasonal impact we don't believe that there will be.
Structural adjustment.
Down and.
And that's our baseline so from that baseline we will anticipate this to be a to be due to get an upside okay from from that baseline and to gradually recover from that there is on the board now to to compare year on year, including the first quarter of this year up to the mix International.
A second quarter, including the significant effort in middle East due to increased supply early Q2, I don't think it's a is what is realistic we have to take a baseline of the second half of this year and and project for Rob and from that base back a recovery.
A fair, but the cold weather related disruptions that you witnessed in Q3 I would assume hopefully are not going to be as acute in a 2021 odd but moving on with regard to.
Yes with regard to your high grading of your portfolio.
We have announced one stem and low flow I'm just curious in terms of what are the most tangible high grading opportunities remaining in your portfolio.
I think we will continue to focus on each and every business.
Business line, we have operating in North America, we have already.
Made efforts to rationalize and to make sure that we operate in a in the basin of North America, where we believe we can sustain additional station and participate fully going forward. We have made a choice to accelerate some technology access and fit for basin in a in some part of our portfolio to high grade their performance.
So I will say that all of our portfolio Don tire business line I would say as opportunity improve their returns.
Their returns by tuning and I think what we have done on structural reset is lifting and the the business line and improved this quarter beyond once seemed the performance of North America business down this quarter have improved so we have way to go to further improve this and you target.
Our recovery of March in North America, and I, We said Oh, we do that on both the growth for the market, where we have a strong alignment of well construction. The pollution. We go read the digital and we do that on the on the bottom line, where we continue to use technology access or restructuring to make sure that we a week ago.
He could a with a with the return we desire Indiscernible America. So we'll continue to to to gradually improve the performance that's our goal.
What I meant by high grading, though was the was the.
Was additional disposition opportunities in your portfolio.
I will not come out on that I think we continue to look at the every portfolio, we'll take a look at it from the light of or does it brought bringing us the growth and accretive return opportunity long run or do we have a better way to monetize and and to be a catching a button.
Think about this portfolio. So this is true for those popular there and as well as in other markets, but we continue to look at it and we will be a we'll be disciplined to making the right decision for the for the shareholder.
Okay. Thank you.
Thank you you're welcome.
We have time for one final question and that will be from the line of Harlan.
Morgan Stanley.
Your line is open. Please go ahead.
Thanks, Thanks for squeezing me good morning.
Morning Connor.
I was wondering maybe a higher level and of course it out here. So we're about to get to look at.
Your new reporting structure, and I know that digital and integration is probably the one that you have the most excitement about growing and improving our earnings from but but if we remove that from the equation.
When we take a look at what you guys are doing in say the third quarter.
Well performance, while construction production systems et cetera.
Where would you sort of point us to in the near term.
Right near term I mean over the next 12 to 18 months here, where would you see the greatest opportunities for improvement in earnings and would you say that that is more driven by costs or more driven by.
Select growth opportunities in those portfolios.
No so setting aside the eni, which have both a margin expansion opportunity and the growth on the back of digital indeed.
I think we kind of get it from well construction, where we believe that our market position will benefit from the return of a of a metre drill worldwide and the efficiency efficiency of our platform efficiencies for integration capability that we have formed by putting this well construction so.
This as a as an ability to solidify our market leadership position and expand and get the benefits of scale. The size of a performance, where we combine a our subsurface and our unique service that explodes or both in exploration in development and in pollution intervention the power offer.
Service connected to do as well and the unique domain knowledge. So I think here, we have unique technology differentiation and unique domain knowledge that when the market will need to extract and be more efficient on existing assets to find the next the the next tie back opportunity or to the explodes, an existing asset to the drilling.
Next a next life extension, we are fantastic does have a performance technology and last ease pollution systemic thing here. This is a story of golf this history of expanding horizon beyond the what we have today, which is from and beyond the end into the midstream. This is a story of addressing the gas Mon.
Good opportunity and connecting connecting the well to the to the sub sea to the surface and creating a unique integration integrated production system with digital as a as a unique elements. So he got very true police agencies them analyze our performance is what we want to propose to the market.
All right that's helpful I'll leave it there thank you.
Thank you very much going on.
So thank you. Thank you everyone for being a ton on this call. So before we end this call I would like to leave you with a four key takeaways.
First quarter was another quarter of operational and financial outperformance made possible by the shipping in execution, we made significant progress on the execution of our strategy with key milestones in restructuring North America strategy and expanding the reach of our digital platform.
So he said of our earnings power is progressing very well, we anticipate significantly improved operational leverage when we put the trough be honest and activity rebounds, providing us with a platform to materially expand EBITDA margins and earnings to come.
The quarter was another strong free cash flow performance in the cycle trough meaningful a meaningful step closer to our double digit free cash flow ambition that we see Paul a priority on de leveraging our balance sheet lastly, the deployment of our new customer focused organization and a fit for basing approach provide us with a great play.
Form to capitalize on the market recovery and deliver on this path.
Conclusion, we're executing our performance strategy and are determined to continue taking bold actions to secure residents and reposition ourselves as clear leaders both in performance measure by customers and returns measured by our shareholders. Thank you.
Ladies and gentlemen, this concludes our call operator, you may now disconnect.
Ladies and gentlemen.
Does conclude your conference call for today. Thank you for your participation for using <unk> Executive Teleconference Service you may now disconnect.
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