Q1 2021 Schlumberger NV Earnings Call
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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, we will conduct a question and answer session and instructions will be given at that time should you require assistance. Please press Star then zero and we will assist you off.
As a reminder, this conference is being recorded I would now like to turn the conference over to the Vice President of Investor Relations and D. Motto Amaze Yeah. Please go ahead.
Thank you Lee.
Good morning, and.
And I'll come to the Schlumberger Limited first quarter 2021 earnings conference call.
Today's call is being hosted from Houston.
Following the Schlumberger Limited board meeting held earlier this week.
Joining us on the call are well leave it at Busch, Chief Executive Officer, and Stephane <unk> Chief Financial Officer.
Before we begin I would like to remind all participants that some other statements we will be making today are forward looking.
These matters involve risks and uncertainties that could cause our results to differ materially from those projected and these statements.
Therefore refer you to our latest 10-K filing and our other SEC filings.
Our comments today May also include non-GAAP financial measures.
Additional details and reconciliation to the most directly comparable GAAP financial measures.
Can be found in our first quarter press release, which is on our website.
With that I will turn the call over to Olivier.
Thank you Andy and good morning, ladies and gentlemen, thank you for joining us on the call.
And in my prepared remarks today I will cover three topics.
Our first quarter results, our progress and our performance strategy and finally, our outlook for the second caldera and signal and half of the year.
And finally will then give mortgage debt on our financial results and we will open the floor for questions.
The first quarter of 2021 was a song type step fall.
The quarter unfolded, as we anticipated and acceleration in North America activity and momentum continuing to grid and the international markets aside from the usual seasonal and effects.
We exhibited very weighted within that context, we expanded our global operating margins for the third consecutive quarter and free cash flow was once again solidly positive yes.
Yeah, some highlights and ship all of this performance.
Radical inflection and sustained growth sequentially and in North America outpaced U S land rig count demonstrating and hence market participation in the recovery.
It's about performance grew when adjusted for the one steam divestiture.
Digital and integration delivered another strong quarter with his he didn't margins on truck.
And while full year target.
And North America execution of our returns focused strategy drove strong margin expansion free aligned we saw double digit margin targets.
And in international markets, despite severe seasonality and the other active exposure in Russia, and China, we continued to growth across geographies.
And the Sundance as the industry prepares front of cycle Beth amongst matters and decision on contract awards and capacity allocation items, because you can be driven by technology and execution.
We are very pleased with the outcome of civil and international multi year contract awards, specifically in middle East and North shore bridging and pipeline that will support growth in 2020 two and beyond.
We are determined to drive past almost this conversation and leveraging our fit for basin technology and digital capabilities.
This COVID-19 combination benefited our integration and performance, which are late largest electric operations, achieving a 6% improvement in drilling efficiency during the quarter.
This strong start other year cocktail is bad because you don't revenue sequential margin expansion and positive free cash flow position us very well to meet our full year financial ambitions and to deliver hedge our balance sheet.
I want to congratulate the downtime to measure team, we delivered strong execution focused and those have and position us for the growth that is now underway.
Next I would like to come on zone, three and amount of our formal strategy that presents further opportunity for growth and this upcoming second and beyond digital sustainability and true measure and you and AG.
Starting with digital 18 months ago, we said at our ambition to lead the digital transformation in our industry and to significantly grow new digital revenue streams.
I want to day to day update you with our progress.
Our digital strategy is a platform strategy leveraging unique and open platforms, Delphine always view and alcohol.
Since launching our cool Delfi platform, we have significantly expanded its market reach from Google cloud to Microsoft Azure and more recently using IBM had that technology to enable hybrid cloud and offer a fitful basin cloud solution.
This morning, and our collaboration with Yandex.
We'll continue to execute on this platform journey to expand the choice for customers and to ship both all three digital business streams workflow data and operations.
First we are focused and miss the opportunity to transition depth technical workflows from the desktop to the cloud to realize productivity gains from debt. If you walk through integration collaboration and access to scalable cloud computing.
Our market leadership on the desktop position us very well to capture this market and the last 18 months, our customers are increasingly transition to the club and hazard and 50% growth of our contract backlog and a tenfold increase in full time debt. She uses as we expand our cloud native application and enable.
Additional workflow within their fee, we expect <unk> adoption across our customer base and hazardous.
And steady growth of our digital work flow revenue.
Second recognizing that data is the key to unlock the industry digital transformation, we work with the industry always do you for them to open source and contribute the underlying debt should that data ecosystem, helping to establish with you as the industry standard.
And then social step to liberate data scale for AI applications and to enable multi vendor in debt payable.
In this context, we recently partnered with Microsoft to offer Azure customer.
Access to always do you enterprise data management solution.
We'll go on to this offering with additional AI capabilities and will also expand our geographical reach.
The market potential for these data business stream is very significant as it underpins every customer digital transformation as exemplified by our recent and incident with Accredo.
Third.
Our customer operations represent a unique opportunity to realize the promise of asset and digital solution.
We designed and open Iot platform Agua to enable edge applications complementing our delfi platform, a portion of our workflows and integrating with our partner Cynthia.
Using I go out and then we are deploying digital operation solutions for drilling and production, both with our customers and that's part of our integrated projects.
This digital offering can significantly impact our own operations as well as demonstrated this quarter in the Codell project and in all main edits to the operations and also greatly benefit our customers.
Our ambition is to establish critical market share and these white space and accelerate collaboration with industry partners to further its adoption.
These three digital business stream work flow data and operation Breathed an open platform are supporting our digital growth ambition. We are very pleased with the progress on our platform Foundation with the adoption by both set of customers and are confident in the success of each business stream as we execute the old nuts.
Moving now to sustainability, we are strengthening our commitment to action Postured Audi as the industry face de carbonization mandate and world leaders and reaffirm commitments or advanced tongue awards in recent days.
As it relates to climate action. These goes beyond and have you seen your own greenhouse gas emissions.
As we believe there is a significant opportunity for our technology and operating practice to decisively impact and exited by the industries, the carbonization effort as well as contribute towards emission reduction goals around the world.
Uptake and energy portfolio includes solution that head buckets and eliminate drilling.
Fugitive methane emissions and leverage automation and digital silver ounce to reduce environmental impact.
This technology focused on low carbon impact.
B and increasing element of differentiation flushed and measuring the Fisher.
An example that resonates with our customer is a complete electrification of offshore production systems.
As outlined in our earnings release with the BP project for subsea to clarification. This is the next offshore from Tia.
And he will also paved the way to full digital enablement.
Beyond our industry, our Ccs partnership Lafarge, Holcim and day Bioenergy, Ccs project, and Menlo Park, California Examples of course sectors initiatives aligned with climate actions.
Specifically interim measure and you energy will hitched milestones in the sector, where we are participating across the energy transition hydro Jean lithium Ccs geothermal and Geo and energy.
During the quarter, we established and accelerated new ventures formed strategic partnerships and gained market exposure and are progressing and derisking technology for upscaling.
We will continue to bring out new debt and as a portfolio throughout the year.
And we will keep you updated on our progress we're extremely proud of the tangible results, we have realized and only a short time.
And it clearly our clients the power of the <unk> brand and to put non sure of this new chapter for the future of the company.
Okay.
Turning to the outlook.
Our reported Habergeon and global economic forecast growth forecasts by the IMF and positive demand forecast adjusted non by both Eylea and OPEC reinforced the transition into a demand led recovery.
Which will strengthen through the second half of 2021, absent, new setbacks and vaccination rollouts or easing of lockdown.
Against this backdrop, we are increasingly confident in our full year activity outlook.
And North America in the second quarter, we just we see sustained activity growth and U S land and the seasonal rebound of North America offshore being partially offset by the Canada breakup.
As our first quarter results have shown basket and well construction and your mix and says it would explosion and North America market will increasingly contribute to our results.
Moving to international markets activity growth with broader and the second quarter with the seasonal recovery in Russia, and China, Oakmont, and continuing growth in Africa, and the Middle East, While Latin America should remain resident.
In addition, the offshore recovery will continue in the second quarter, including the gradual return of exploration and appraisal and key international markets.
The desk and divestiture of our international and franchise gives us great exposure to this market expansion, especially in well construction and because of our performance, which will lead in the second quarter.
More broadly we anticipate all division to grow sequentially at different pace and margin expansion to be led again by it is about performance and vertical section.
And in light of this day.
Actually we expect total second quarter revenue to go and mid single digits and our operating margins to further expand by 5200 basis points.
Looking further into the second half of 2020, one and north.
And some erika the pace of growth is expected to moderate on budget exhaustion, and sizzle and effect, but could surprise to the upside hazard thing and for your growth when excluding the impact of divestiture.
And the international and markets are components, and our second half outlook as been strengthening based on the latest international rig count trends Capex signal and customer engagements.
International activity will broaden and accelerate in the second half impacting short to long cycle, both on land and offshore including the productivity in the most advantage offshore basins.
The magnitude of these leading indicators combined with our broad revisions to global economic growth and demand recovery presumed put onshore from four and even stronger reflection than initially anticipated for the second half of the year.
Therefore, we have greater confidence in our previous guidance of a double digit increase and international revenue in the civil NAV when compared to the same period last year.
And upsell of a setback in the past economic post pandemic and recovery, we foresee and upside for full year growth internationally and as a team and a stronger footing as we enter 2022.
And the context of its top line growth and the steps we took to reset the earnings power. We are confident that we will fully realize operating leverage to deliver our full year ambition of 250 to 300 bps margin expansion year over year.
We expect to continue expanding during margins during the recovery to support increasing cash flow throughout the year, which should provide.
<unk> opportunity.
Now I would like to pass the call to Stephane.
Thank you Olivier and good morning, ladies and gentlemen.
First quarter earnings per share was 21 <unk>.
And there were no charges or credits recorded during the first quarter of 2021.
Excluding the charges and credits recorded in the previous periods. This represents a decrease of <unk> <unk> sequentially and <unk> when compared to the first quarter of last year.
Overall, our first quarter revenue of $5 2 billion decreased approximately 6% sequentially. However.
And we addressed by the <unk> team and artificial lift low flow divestitures, which were completed during the fourth quarter of last year.
Revenue was essentially flat sequentially, despite the first quarter seasonality.
Excluding the impact of divestitures, North America revenue increased 10% sequentially, reflecting.
And reflecting a significant activity on land.
Actually offset by lower product sales offshore.
International revenue declined only 3% sequentially. Despite the effects of the extended winter appeared we experienced in Russia, and the usual seasonality and the far east.
Pre tax operations operating margins were 12, 7% and have now increased for free quarter and enroll in addition, pretax operating margins were 230 basis points higher compared to the same quarter of last year.
This represents the highest margin since the third quarter of 2019.
And with strong margin performance reflects the significant operating leverage we have created through the combination of the high grading of our portfolio and.
And our cost out program, which is now essentially complete.
Company wide adjusted EBITDA margins of 21% for the first quarter were flat sequentially as the positive impact of the Wednesday, and divestiture was offset by the seasonal effects, we typically experience in the first quarter.
EBITDA margins were 200 and free basis points higher compared to the same quarter of last year.
Let me now go through the first.
The first quarter results for each division.
First quarter of digital and integration revenue of $773 million decreased 7% sequentially driven by seasonally lower sales of digital solutions and multi client licenses.
Margins only decreased by 47 basis points to 42% as the effects of the digital solutions and multi client revenue declines were largely offset by improved profitability from EPS products.
Reservoir performance revenue of 1 billion decreased 20% sequentially. However, excluding the impact of the divested Wednesday and business revenue increased 3%, despite seasonally lower revenue in Russia and China.
The revenue growth was driven primarily by higher activity in Latin America, and the Middle East.
Margins increased 260 basis points to 10, 2% largely due to the divestiture of the Wednesday and business that was dilutive to book.
The division's fourth quarter margins.
Well construction revenue of $1 9 billion increased 4% sequentially and margins increased 103 basis points to 10, 8% due to increased activity in North America land and Latin America.
This growth was partially offset by the seasonal slowdown and drilling activity in Russia and China.
Production systems revenue of $1 6 billion decreased 4% sequentially.
International revenue declined 4%, while North America was down 3%.
Despite the revenue decline margins only decreased 71 basis points to eight 7% as a result of cost measures as well as improved profitability and midstream production systems due to higher activity.
Now turning to our liquidity.
During the quarter, we generated $429 million of cash flow from operations and positive free cash flow of $159 million, despite severance payments of $112 million and the increase in working capital requirements and we always experience in the first quarter due to the annual.
Payout of employee incentives.
And our cash flow will improve through the throughout the rest of the year consistent with our historical quarterly trends.
Our net debt at the end of the first quarter was $13 7 billion, a decrease of 207 million when compared to the end of the previous quarter.
During the quarter, we made capital investments of 270 million. This amount includes capex investments and EPS projects and multi client.
For the full year 2021 and we are still expecting to spend between one five to $1 7 billion on capital investments.
And that note, let me take the opportunity to provide you with a quick update on our capital stewardship program.
Optimizing the allocation of our capital investments will be critical to maximize the benefits of the ongoing activity recovery, which is poised to accelerate in the next few quarters.
As part of the company's reorganization, we implemented a new capital allocation framework that governs all types of investments.
The underlying principle behind the framework is that investments opportunities are prioritized based on returns and cash flow before and yoga metric and the corporate level with framework allows us to critically assess our technology portfolio and.
And rationalize our offering to reduce capital intensity and maximize returns at the division level, we have strengthened our processes to ensure that new assets as well as existing assets are deployed where they will generate the highest returns and we are also leveraging this capital discipline.
To drive commercial behaviors and improve the quality of our revenue.
With this in place we remain confident in our ability to achieve double digit cash flow margin free cash flow margin for the full year of 2021 and beyond this will allow us to deleverage the balance sheet, which remains a top priority for us.
It is worth noting that during the quarter. The two major credit rating agencies confirmed our long term credit ratings of AA and a respectively.
And both seated or expected strong cash flow profile and our commitment to deleveraging.
I will now turn the conference call back to Olivier.
Stefan So I believe that we are ready to open the floor for the Q&A session.
Thank you, ladies and gentlemen, if you would like to ask a question. Please press one and then zero on your telephone keypad and you will hear acknowledgment that your line has been placed in Q you may remove yourself from the queue by pressing one zero again on your telephone keypad one moment. Please.
And our first question is from James West with Evercore ISI. Please go ahead.
Hey, good morning, Olivier and so on.
Morning Zone.
So Olivier and good great to hear your increased conviction about international topline growth and the second half of this year and I'd love to hear to understand how youre thinking about the slope of shape of that recovery and then really as it relates more so to 'twenty two and.
And 'twenty, three which I think will be very board years.
Okay.
No. Thank you. Thank you James I think first I think I believe it's clear that we are about to enter demand led recovery and I think the macro factor both economic growth and.
What we are seeing indicates that.
And the old demand recovery.
Will.
Rich 2019 level.
And by or before the end of 2022.
In this context I believe that.
We are already and.
And studying at.
And during the second half of this year facing the beginning of a demand led recovery that we'd take a multi year eight.
Recycle and industry up cycle.
In this context, if you look at the EPS unfair.
And third of Underinvestment and look at the total constraints in North America due to capital discipline.
I believe that this will create the condition to create a significant pull on international supply.
So this will support international supply activity buildup.
Not only at the end of this year, but well into 2020 free.
In addition to this I believe that the offshore and being a unique market previous edge market for iOS is some emphasis and focus and independent will also see a gradual but very strong recovery over the long term.
It is.
And the and offshore Brazil advantage basins and represent.
Extremely good oil production plateau for some basins and low carbon footprint.
This will support also the long term international recovery. So we believe we believe really debt, we are very well positioned to outperform and this Michael because we believe that this macro outlook that would include a growing international mix, including offshore.
We play very well to our strengths.
In addition, we have accelerated at all.
Strategic transformation, both the organizational transformation and key strategic element that will play very well.
Efficiency performance focused from our capital stewardship are fit for basin that is resonating very well for customer and finally for our digital and decarbonization strategic focus we are putting so I believe that we are seeing the beginning of this midyear growth. We're also seeing that.
Our performance strategy is resonating very well for our customer and we have been awarded several multiyear contract that is debt are creating the backlog we need to support this growth going forward. So yes, I'm optimistic not only on the second half of this year, but on an accelerated path in 2022.
And long cycle strength, including offshore in 'twenty, two 'twenty three and beyond.
No doubt.
It's very clearly there thanks for that and.
And maybe the second the follow up for me is on the margins you've had good margin progression and the last and three quarters. How do you think about sustainable margin progression.
And the expansion as the recovery takes hold.
I think going going forward and <unk>.
As we enter this industry up cycle I believe there are three elements as we favorably impact our margin expansion.
First I think is the as I've described is very very favorable macro outlook that combine the pace of international and Gulf. The offshore element and also as we are saying to see this quarter. The return of exploration and appraisal activity that is needed to hit Plenish. The reserve and also that is becoming.
More and near field exploration close to the offshore hubs and basketball. So these factors are very thorough and secondly, I believe that we have created quality revenue.
Initiatives as part of all of our initiatives first fit for basin fit for basin technologies, creating the premium that differentiate us in some critical basin and some critical assets and give us a premium for revenue quality improvement. Similarly, I think our technology access as we have seen and North America as bad gradual.
And helping us to expand market, but also to command premium with our technology partner and suddenly the success of digital will be accretive over the over the periods and to this so the further and I think beyond the strategy I think is the day.
The step change, we expect to materialize into our integration complex.
From a performance efficiency using digital as we have demonstrated already using fit technology and using practice debt are becoming best in class. So I believe that this freedom and the backdrop.
The key and amount of our strategy for revenue quality and the enhanced margin on our integrated contract will all combine to credit condition for further margin expansion and acceleration of our margin expansion going forward.
Excellent Thanks Olivier.
And our next question is from David Anderson with Barclays Capital. Please go ahead.
Hi, Good morning, Olivier just wanted to follow up and on the discussion around the middle East.
Talking about robust growth in Saudi and Qatar. This this quarter.
It really seems to be kind of first tangible signs of international inflection I was wondering if you could talk a little bit about that performance during the quarter and whether or not those were new contracts, starting up or existing contracts starting coming back on but more importantly, I'm wondering if you could just talk about the types of tenders that are being discussed and the middle East and do you see projects that would be expanding capacity and the region.
And also do you think this will be more project management work and that you talked about LLS teekay kind of do a little bit better this quarter.
Do you think that's going to be a bigger part of the mix going forward.
I think for first to comment on our.
Growth in Missouri is indeed, we had sequential growth and middle east during the quarter and I think this was led by indeed, Saudi and Qatar two to large extent.
And this was due to two factor and kept our thing is our market position combined with the activity growth.
Resulted into and to activity in the in.
In Saudi I think it's more related to performance and activity.
Activity share awards that resulted from our performance and execution in the quarter and I think we see this factor off of a strong market position we have of.
Foremost differentiation to help US go forward. So that's a two to maybe support and and and.
Substantiate what we see going forward and addition to this as you have seen from last quarter to this quarter. We did announce some critical awards that are securing our expanding this market position, Missouri Nowadays.
Now there is a lot of LST again, some of our peers as talked about large and varied alger.
Contact tenders underway, so I cannot and will not comment on that.
And this as these tender underway, but what I can I say is that the activity is rebounding and the activity outlook, both land and offshore middle East is and will be strengthening so our customer are indeed, securing capacity and looking for best performer and looking for.
And in a sense the condition that will make them successful in their ambition too.
Months their capacity and oakmont, the pollution going for a while so it would be performance that will matter most in the future formulary Simo opinion.
Makes sense.
And my other questions on the digital side, you made a lot of progress over the last year, establishing a footprint.
With the platform with Delphi.
And across a lot of IOC and NOC is I believe chevron's actually even to implementing across the Permian.
Feels like Youre kind of where you want to be in terms of your footprint. It was interesting to hear you talk about the three elements of the work flow data and operations. So.
I'm just wondering if you could just maybe expand a bit on how you see each the pace of growth and each of those.
And what is that dependent upon.
Partly I'm wondering is it customers just getting more comfortable and using digital and day to day operations.
But do you also need to build out new software applications or maybe it's just something else.
No first I think it is clear that we need to recognize and industry as it does come out of this crisis and turned into new landscape is realize that digital is a tenant of the future and digital is here to impact efficiency performance and to make this industry more visit and further long term. So first day has been a catalog.
And the last 18 months that accelerated adoption of digital and that's the first we believe that our platform strategy is being recognized accepted and across different customer types from National company two independent too.
Two the IOC is as you have seen there is a large adoption of this.
Because we have kept this platform open now and when it comes to the pace and and growth factor that additional shade workflow data and and operation I believe that workflow is the one that is the most mature because it builds on our existing desktop.
Market leadership, we have and here we are transitioning the existing customer base, we have towards the cloud and each of them is realizing the power of the cloud from productivity from collaborations from access to scalable cloud computing, where we simply need to Russia and that our platform is open and that they can make the choice.
Their choice on the cloud infrastructure, which we are doing.
The second data thing is is the Renaissance of the data market debt used to be and major market and digital 20 years ago, everybody realized that with other data we can unlock the power of digital transformation. So thankfully the industry has come together and as credit is always the new platform.
And subsurface debt a universe.
Driven by the open form and we have been fortunate to actively contribute our debt vehicles used entities, so and that foundation and.
Every company will have to.
Rollouts and and we'll set and use the opportunity to rollout or is the use of platform. So that it unlocked and data access and deliberate the data and then.
Debt provider, and then service provider, considering companion and the Crystal and himself will tap into this data using AI application and this is where we want to participate both the debt to a transition to this new platform and the AI opportunity upon this.
Finally operation Operation and studied the biggest surprise and long term.
So the most difficult to realize because every asset and.
Every infrastructure on the feed entry and factory at the edge is different so while we believe that days and months opportunity to use digital and operation and we are doing it very successfully internally the complexity the system integration needs and the fit for purpose.
Total deployment will slow down.
And the adoption of this yet we will make progress and we'll continue to partner with with other companies to make sure that we offer integrated offering to the industry. When you combine these three at the defense space of growth you create the condition for multiplicity of revenue stream that will support our double digital ambition debt.
Her eyes, which and dedicate.
Thanks for the information thank you.
Thank you.
Our next question is from Chase Mulvehill with Bank of America Merrill Lynch. Please go ahead.
Yeah.
Favorable average.
And I guess first thing.
Good morning, first day order too.
To hit on was kind of new energy and.
And so I don't know if maybe at a high level could you just take a minute and talk to house from Virginia during the new energy environment and what are the key highlights of your new energy transition strategy.
And it actually would be great. If you could lay out the perspective roadmap Schlumberger embarks on this new energy transition journey.
Yes, Great question chose the other thing is you have seen we've decided to enter a new chapter for the company and the way we decided to go. After this is to first identify and selectively the domain in which we believe we can leverage our strengths the subsurface calibrating, our strengths our technology and global footprint.
And to create and force partnership technology acquisition or organically grow.
And the domain. So firstly, we are <unk>.
And at two.
To explore and establish market position and diversify our market entrants into this domain. So you have seen that we have in parallel from lithium to ccas from <unk> to June <unk>, and geothermal credit adventure each of them with potentially a different partner.
Addressing a different.
Industry sector, so that to diversify not only our approach, but diversify and expand our market reach so that has been the first is to make sure that we diversify investments diversify our market approach and our type of partnerships. So that has been our first.
And I will say.
Framework that we've used to develop this now what his ambition. The ambition is to is to create the future of the campaign and the long run so within the decade and within the next two or three years, specifically, we will de risk at scale. This.
Technology investment and venture investments and working with our partners working internally to develop those technology as we are for green hydrogen as well with Ccs.
Ccs Mendota bioenergy plant, all with Lafarge Holcim for Ccs on cement cement plant will really work develop.
And backing to venture debt.
And the risk and hence and then when it is the risk at scale. We will then make bigger investments large investments debt that will then support the long term growth.
Perfect.
A quick follow up.
James first question around international.
You mentioned that 2019, so next year, we can kind of get back to 2019 levels.
So I guess my question would be 2019 was pretty tight and you're starting to see some pricing. So if we get back to 2019 levels next year like what could this mean for pricing and when we think about the full international cycle could we actually see.
A real pricing cycle unfold internationally as the recovery gains momentum.
Our first I think our approach to this is first and foremost performance, we believe that <unk> create the revenue opportunity the revenue quality and the margin expansion, we believe that other foundation of our strategy.
Now whether the market capacity and some basin for some specific business line, we create the conditions for.
And our pricing I believe and weighted.
But again it will depend on how do we differentiate for performance how do we make sure that our technology and unique and ease and high demand and Kelly condition for the customer to accept to a premium on this technology and that's our approach now whether the capacity global capacity will create.
And a short term global pricing I don't see and weighted but I think it will.
Set and in the coming quarters great.
Price inflection on some business line in summer and some base and you are already seeing it today in North America for very specific.
Well construction technology that is in high demand and the amount of premium.
Okay perfect I appreciate the color Olivier will talk about.
Thank you.
And next we go to the line of Scott Gruber with Citi reached city excuse me Citigroup. Please go ahead.
Yes Hello.
Morning, Scott and I and Oregon, Good morning morning.
So the DNI margin at 32% Super impressive how should we think about incrementals for that segment over the course of the year by definition and they obviously need to be healthy given the starting point, but whats the reasonable range and relatedly.
As you get deeper into the digital management contracts with customers, obviously profitability improves over time.
Will that be a material driver during the rest of the year or is that incremental margin benefit.
More and 'twenty two and beyond.
No I think first I think we when we provided our guidance for full year.
Margin at 30% and a clean do you have seen that the way. We started the year is putting us on and external footing to realize that that margin outlook and its margin comes from two major factor and one is the performance of our integrated into cash and complex and secondly, the strengths and margin of our digital business now going forward and and all and into the.
The later part of the year, obviously, the digital will gradually start to improve it's it's it's size and will create and generate the full two does it brief will support these 30% ambition and <unk> as we exit 2021 clearly.
Our form and put us on a better and March and a part.
Opportunity from margin expansion into 2022, so over time long term the digital will indeed.
And so and we.
<unk>.
We share that our ambition, there and will actually help continue to support.
This impressive margins and and possibly expand it further and the long term.
Got you.
And then just shifting gears, a little bit and and maybe somewhat premature to ask but just given that the international recovery outlook is strengthening and obviously the capital and sent to your portfolio is now and the decline how do you think about the use of free cash flow is the focus purely on building cash and de leveraging what conditions would.
And you look Florida to start enhancing the cash return and and as we move deeper into the recovery is there a preference for dividends enhancement versus buybacks.
And is ready to return cash.
Mhm so.
I'll answer that question Scott.
Yes, you you said that our immediate priorities.
Need to deleverage the balance sheet.
At the same time, we want to make sure that we can sustain growth and our core business of course, even though our capex intensity has reduced quite a bit compared to robust, but we also need to leave enough capacity to execute our strategy, particularly as it relates to the two new horizons of growth.
In any case, we're very it relates to our core business. Our white space is as I mentioned during the prepared remarks, any new investments will be looked at under the strict plans or return based capital allocation framework and.
And beyond that yes.
And once we have filter and all this project, we will return any excess.
Cash to our shareholders flavor dividends or stock repurchases, we do not other prescribes pleads between between the two it will depend on the conditions at the time. The time, we have to make that decision and in particular, the sustainability of cash flows.
Got it I appreciate it.
And our next question is from Sean Meacham with Jpmorgan. Please go ahead.
Thanks, Good morning.
Good morning Zone.
And so I appreciate the commentary on the outlook from the Middle East, maybe just a follow up.
Can we talk about the legacy margin dilutive LST Contra lck contracts.
And to what extent have you been able to mitigate some of the challenges there. They're now a few years old and I was just curious to what extent does.
And there is a contract roll create opportunity for resetting the margin impact from those contracts maybe in the medium term.
Yes, I think as you know for the last three years I think we have been and closing.
Lucas managements and passion and focus on.
And on resolving our improving this.
Highly dilutive.
Contract that there were two or three years ago and I think we have made we have made great progress.
What are they are exactly where we'd like them to be and accretive to the overall margin and maybe not but I think we have made progress in three directions, first engaging and for customer and making them realize the complexity and provenance and support to execute this contract with better support and eliminating or mitigating some risk.
And secondly by adopting and accelerating adoption within this compact of FIFA based and technology that are unique and that we create for the long run and opportunity to set benchmark on those complex and to keep.
Our market, our market position and enhance our future.
Future execution, and finally, we have and the last few quarter last few months actually trying to rollout.
And our digital operation capability to ex Hot further automation and further efficiency on this so we have and improve enhance customer collaboration and those contract. We have created the technology portfolio that is starting to mitigate and enhance the operational and execution and we have rolled out.
<unk> unique digital features that are carrying so those condition a unique customer recognize it and I think as we will get a positive renewed its contract and expense would've UC look for making sure the commercial terms and the revenue quality would exploit and the future will be more accretive than they are today.
Sure.
Thanks, Olivier that's very helpful.
And that's encouraging as well so just to come back maybe to cash flow.
And north of $2 billion of free cash looks to be the bar here for full year, just given the 10% margin target.
And you just maybe highlight any major levers that would materially deviate from that goal and then I'm also just thinking beyond cash flow.
Are there plans for potential further pruning of the portfolio.
Optimized spent per base and maybe help accelerate delevering and the balance sheet.
So look a show and I don't think Theres anything thats going to deviate from from us achieving.
Double digit.
He is possibly more than 10% free cash flow is here and there is a typical sales.
Seasonality and the and the working cap and free cash flow throughout the year or so free cash flow will improve quarter after quarter like it has and in the past and we will deliver on that ambition.
And it can be enhanced by our exceptional proceeds.
We are continuously looking at our portfolio as I mentioned earlier.
We are particularly working on.
And <unk> divestitures, one is our I mentioned in the previous quarter in regards to our EPS portfolio.
We are looking at launching very soon and the next few days actually a formal process for the EPS asset and <unk>.
Canada is a lot of interest still and the economics have improved quite a bit. So we are quite hopeful there too to close a good transaction and the second one is the is the rigs we have and in the middle East we are actually even more advanced where we are in a formal process we have shortlisted.
Interested buyer, then boundaries and concluding the due diligence so we should be closing on signings already this transaction.
And in the next few months or so this will enhance the cash flow profile and the potential reduction and of our net debt and the flexibility it will given on liquidity and visit.
Very helpful. Thanks to you both.
Thank you.
Next we go to Connor Lynagh with Morgan Stanley. Please go ahead.
Thanks, Good morning.
And going on.
I think we had noticed that you guys were a bit more upbeat.
On the offshore side of things and basically I'm wondering if you could frame. How you think that market is going to trend relative to last cycle and in particular, how do you think customers are thinking about exploration activity.
It's a great question I think first.
Is what's <unk>.
Saying that the offshore basins and the most advantage offshore basins are still very much very critical resource and core resource for some of our customers I will seize some unique <unk> and <unk> and a few independent the dah debt.
Pure play offshore independence from relative medium to large size. So first this resource are precious and.
This resource typically have a good geology and as I said, both from the pollution plateau.
They provide and all the low carbon.
Fortunately, the AV and demo mix, our API great Athene. These external resource the second thing I believe is that the.
The economics for offshore due to integration success fit technology, and digital practice and improved from the last cycle and I think the opportunity exist for industry to leverage this and accelerate some <unk>.
Going forward. So another factor that is very critical as you touch the exploration and appraisal is that most of the major and large NOC on this in this context, our book Nizing the impact of exploiting hubs offshore.
Offshore hubs and offshore hubs the opportunities too is to exploit those hubs to improve the return on assets improved return and infrastructure and focus on near field or backyard exploration. So that they maximize the return on existing infrastructure existing <unk> existing platform so that it.
He is also something that plays very well in our portfolio for infill drilling all four subsea tie back as we are expanding and this domain. So I believe that the exploration and appraisal women. This city accelerating frontier exploration, which would accelerate and near field exploration offshore investing starting to cities this quarter.
And would accelerate during the second half of the year, So I'm optimistic indeed on offshore and.
And if you read some of the high start or.
IHS reports and some of.
The report.
And the pipeline you see that the <unk> pipeline that our pre committed towards 'twenty two 'twenty three.
And have the potential of our 'twenty two 'twenty three and beyond to eclipse. The last 2017, 2019, and Tam of number of projects, but also in terms of total capex invested in deepwater.
Got it Thats helpful.
And maybe just sticking with the offshore theme could you help us think through on the production systems. I think you called out you expect at all divisions to grow sequentially, but how should we think through the long cycle portion of that business, particularly the subsea business.
Yes, I think first the production Sistema thing is is not only subsidy portion system is both short and long cycle is explored as exposure and short cycle and North America to the ESP, which is coming back strongly and the camera and surface equipment also servicing the faq and our partner Liberty.
And also and internationally is indeed, a mix of short for ESP, and some completion equipment and long cycle from midstream as well as for subsea and surface equivalents. So it's a mix of long and short with very very tangible exposure and in North America, benefiting and shutdown and.
Long term international long cycle, both recovery and pollution, new new product in that context and back to the point on offshore I believe that the subsea market is it.
Is that your life and I think last year. The number of number of subsea trees were so short of 200.
Compared to higher than the $2 15 in 2019. The prediction. This share is to be above 210 to 20 is operation and and aligned with the market condition and this will this will be more or less.
In closing going full out gradually to be within and between 250 to 300 of other over the midterm paired to support these offshore projects.
I appreciate the color. Thank you.
Thank you Connor.
And our next question is from Marc Bianchi with Cowen and company. Please go ahead.
Thank you.
The guidance.
Guidance for second quarter per the.
And mid single digit revenue and 50 to 100 or more.
Margin improvement.
It seems to suggest a little bit.
Maybe weaker margin progression and I would have otherwise expected and certainly if I look at the operating leverage that the business has had over the past few quarters. It would seem that there is a little bit less operating leverage implied and second quarter. So I'm curious are there some unusual costs that youre, realizing perhaps their startup cost for some.
These contracts you mentioned.
Any color around that and how maybe that could progress beyond second quarter would be helpful.
Yes, Marc Thanks. Thank you for the question. So indeed, AGA Alonso for operating margin expansion between 50, and 100 EPS into the into the mid <unk>.
Mid mid single digit would still imply I hand of that and that range 30, plus.
Income on total so I believe that.
This is this is the first remark the second and is that we have seen on park.
And very confident on our 250 to 200 full year tranche.
And the bps full year margin expansion. So in the second quarter. Indeed, there are two factors one is.
And the file at you and mobilizing for what day.
And the offshore return and some of the activity that are prepping.
And mobilizing for a second and second half already in the later part of the call. There, but also there are some persistence, but Tom price.
COVID-19 related constraints and cost debt as the lockdown is in place in many countries that are adding other cost upfront into those modernization and making this mobilization cost maybe a little bit more than they would have been in other second and the path. So.
And that these other factor that are shaping up but we are very confident that margin expansion is in place and will continue going forward.
Wonderful. Thank you for that and then you mentioned in your prepared remarks, and then and also in the press release about the kind of double digit growth for the for the second half and international setting up for kind of upside to our already robust growth anticipated for 2020 two.
I'm curious what the baseline is for that comment are you referring to.
Our market forecast that's out there or are you referring to sell side consensus just curious what the benchmark we should be thinking about it.
It's a combination of factors as I said I think there are some market indicators from the capex of some of the NRC National Company. There is a rig counts projection that we are making based on non engagement with customer and with rig contractor and there are some markets position, our market and incidents and contact award.
We have been benefiting and the last.
The last the last few quarters, so that the mix of our market position favorable mix.
And the.
And market expansion and international for that does and animal of seasonal effect as well as the investment and the national oil company and increasing the investment and second half all combine to make us more continued on and where three months ago on the shape and inflection of this recovery in the second half.
Got it thanks Olivier.
Thank you very much.
Ladies and gentlemen, I will now turn you back to Schlumberger for closing remarks.
Okay. Thank you very much so thank you and to conclude I would like to offer three takeaway.
First the macroeconomic and activity outlook.
And kissingly supporting and attractive industry up cycle cash.
And with an inflection in international activity and consolidation of short cycle activity and then return other advantage offshore place all playing to our core strength.
In particular, we are increasingly optimistic about the international growth trajectory during the second half of the year, which absent of setback and pandemic recovery will result in full year international growth.
As a consequence, we have reinforced our confidence and our 2021 financial targets on margin expansion and free cash flow generation.
Second we are convinced that our performance strategy is aligned with a new industry landscape and is increasingly resonating with our customer as performance matters critically in this environment. This is translating into market wins, partially in middle East and offshore basins, and we support our ambition to outperform through the cycle.
In addition, the steady progress and our digital strategy will translate over time, and expanding new revenue streams and accretive margins.
Third the margin expansion realized this quarter, both sequentially and year on year, reflecting the impact of both our capital structure and to restructuring program and.
Will translate into substantial operating leverage as the year progressed and activity strengthened in all basins and we anticipate the upcoming quarters to further this margin expansion with broad contribution from our Beijing and divisions.
Finally, our commitment towards both sustainability and new energy is materializing and a growing portfolio of technology and ventures that could contribute to the global climate actions and to the future of the company.
Ladies and gentlemen, this year represents a unique opportunity for the new Schlumberger to execute on its new performance journey and outperform the market was in an increasingly attractive outlook.
You very much.
Yeah.
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