Q1 2023 Schlumberger NV Earnings Call
Right.
Yes.
Yeah.
Ladies and gentlemen, thank you for standing by and welcome to the S. L. B earnings Conference call. At this time all participants are in a listen only mode. Later, there will be an opportunity for your questions. You May press one than zero to place. Your line into the question queue. You may remove yourself from the queue by repeating the same ones there.
Oh command as a reminder, this conference is being recorded I would now like to turn the conference over to the Vice President of Investor Relations, Andy Murray will Amaze you. Please go ahead.
Thank you Leah.
Good morning, and welcome to the S. L. B first quarter 2023 earnings conference call.
Today's call is being hosted from Rio Brazil, putting a board meeting held earlier this week.
Joining us on the call Oh, Liberty Parrish, Chief Executive Officer, and defend the gate.
Chief Financial Officer.
Before we begin I would like to remind all participants that some of the statements will 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.
Therefore, we 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 ladies and gentlemen, thank you for joining us on the call today.
In my prepared remarks, I will cover three topics.
I was beginning to be felt debate on how first quarter results, then I will share our latest view on that.
Michael and our positioning for long term success.
And finally I'd be crazy for outlook for the second quarter and full year.
They probably will then provide more details on our financial results and will open for your questions.
It hasn't been a great start of the year as we have achieved results that set us on a solid footing for a four year old financial ambitions.
On a year on year basis, all financial and operational results were strong across all geographies and divisions.
Following their remarks.
In our earnings release this morning, I would like to emphasize a few key highlights from the quarter.
First we delivered very solid year on year growth at the magnitude the lasting more than a decade ago.
Geographically young our growth rates in North America, and internationally, where comparable more importantly, the rate of change is sitting more in February the international market, where sequentially where expenses smallest decline she's only decline in recent times.
Collectively all core divisions grew year on year by more than 30% and expanded operating margins by more than 300 basis points.
We continue to position the core for long term success, we seem to become contract win and thickness innovations that improve efficiency and lower our carbon emissions.
A great example is negotiated as youre, putting that base to 731 integrated system and one of our latest transition technologies launched earlier this quarter.
You really find many examples of these contract wins and the performance impact of our new technologies in todays press release.
In digital we maintained strong growth momentum and also secure more contract wins at.
At the division level, the amount of year on year Arabian Gulf in digital was somewhat masked by significantly lower Aps revenue due to production interruption in Ecuador, and lower project revenue in the Palliser asset in Canada.
Additionally, digital continues to help us elevate our efficiency and margin performance and Nicole as we deployed the solution at scale.
Mobile operations.
And then you would imagine you've continued to make progress across our portfolio, notably with new carbon capture and sequestration activities that raised our investment to around 30 project Liberty.
Tcs is woke organized as one of the fastest growing opportunity to reduce carbon emissions and maybe the tailwind from the U S infection reduction Act and ovarian studies around the World. We expect more project to move forward to final investment decisions in the next two years.
Finally, whether they begin a commitment to increase returns to shareholders.
During the quarter, we along shall share buyback program with repurchases totaling more than $200 million Wolf of chefs.
I would like to really think the entire <unk> team for their hard work and for delivering yet another successful quarter.
Moving to the Michael we maintain a constructive mid tier growth outlook.
Through the first quarter, the residents breadth and reliability of the up cycle I was the only become more evident.
I would like to take a few minutes to describe the select us.
To begin the I'm, telling demand investments and activity during this cycle a resilient despite short term economic and demand uncertainties.
The combination of energy security.
Asian of long cycle projects and Opex policy.
The condition for a decoupling of the activity outlook for shop down demand uncertainties.
Indeed, it is a security remains a top priority for most countries and he's driving structural investments that they'll go down primarily by national interest.
The extent of these investments is resulting into a broad ranging growth outlook comprised predominantly of his he don't long cycle projects in the middle East the international offshore basins.
And gas products.
Collectively we expect these market segments to reach or exceed more than two third of the total global upstream spend and support the long tail of resident activity over the next few years.
Isabel at the North America market characterized by higher short cycle exposure is also set to benefit from positive demand outlook and supportive commodity pricing.
However, this would be impacted by an anticipated activity plateau in the shop them, which will subsequently be afflicted in production volumes.
Moving to the dimension of breadth and duration.
These are also best emphasize by the latest activity outlook for the middle East and offshore market segments.
Fundamentally the people to both six months as ankles of supply growth is a defining attributes of this cycle.
This is providing an unprecedented level of investment visibility and escape that is setting many records.
In the middle East the largest ever investment cycle has now commenced.
This will support ongoing capacity expansion project over the next four years in both oil and gas.
Secondly.
This show, we expect to both the highest revenue ever in the Middle East put you guys on track to achieve our mid tier growth aspiration.
Simultaneously, we are witnessing tribe activity expansion in the offshore market.
Our show activity.
Continues to surprise to the upside with breadth and the diversity of opportunities across all major basins.
In addition, the latest projections and industry reports indicate that the offshore sector is set points I was growth in a decade with more than 200 billion in new products through the next two years.
This growth will be supported by three layers of activity.
First the resumption of infill and tieback activity Metro basins, which was very visible across Africa in 2022.
This will continue to strengthen in multiple geographies from this year onward.
Second ongoing large development project in both oil and gas that are ramping up and starting to scale. This is evident in Latin America, such as <unk> in Brazil, and in the Middle East such as in Saudi Arabia, UAE and Qatar.
And third the resurgence of exploration and appraisal activity, which is starting together strong momentum in the existing basins and new frontiers from West and South Africa to the east many Donnie we're starting to see exploration appraisal at the pace that was unforeseen just a few months ago.
Additionally, the activity pipeline continues to engage with new licensing rounds, and new blocks awarded.
As a result, we believe that we will continue to witness durable offshore investment for many years to come.
Let me spend a couple of minutes highlighting what this means for a Saturday.
As the cycle unfolds the characteristics absolute described continue to languish measure strength in alcohol.
This will support additional activity intensity for well construction accelerated growth opportunity. You know is that our performance to the return of exploration and appraisal activity and further long term growth potential for production systems.
One such example is the tip you suck out are you projecting ourselves on black Sea offshore Turkey.
This project evolve all coal divisions, she putting the development after challenging subsea gas asset in December two news construction of a gas production facility.
Demonstrating <unk> unique ability to integrate that scale from pole to process.
Looking more in depth, our predictions systems division is in a unique position as a long cycle level of growth for us with quarterly year on year results, demonstrating our ability to fully honest it's about onshore.
We believe momentum is set to continue but if you think from a strong market presence in the middle east and in offshore basins.
In this division, we anticipate cumulative bookings in the range of $10 billion to $12 billion in 2023.
Significantly from 2022.
We have taken a strong step forward towards this ambition with more than 3 billion dollar bookings in the first quarter.
And the outlook. She bolt continued strong bookings through at least 2025.
Overall, this would provide durable revenue growth and a significant installed base for services in the years to come.
In this context I exposure to the deepwater subsea market remains an essential component of our growth opportunities and we continue to strengthen despite of our portfolio with much success.
In subsea we have grown 20% over the last two years and I've already generally are already generating EBITDA margins in the high teens bidding a lot of technology.
Performance in execution, and the death of our processing portfolio.
We expect strong momentum for this part of our business to be sustained through 2025 and beyond.
To conclude we are in the midst of a unique cycle with qualities that enhance the long term outlook for our industry resilience breadth and durability all reinforce by people out to the middle East offshore gas and return of E N a.
We could not ask for a better backdrop to execute a returns focused strategy.
During the early phase of the cycle led by North America, our reserves have already demonstrated our ability to capture growth ahead of activity and expand margins visibly beyond pre pandemic levels.
Looking forward, we are positioned to fully harness the international and offshore momentum that is now underway and to further our margins expansion journey.
In the quarters ahead, we'll continue to demonstrate our returns focused capital discipline and commitment to shareholders who dance.
I'm truly excited about the outlook for a Saturday.
Next I would like to come out on our progress over the shorter term.
For the full year, our strong first quarter.
Give us a renewed confidence in our financial ambitions for 2023.
We're a prime probe revenue growth and margin expansion for the year underpinned by very solid international outlook.
North America, we should expect tangible market drove but at a lower rate that ordinary anticipated at the start of the year, mainly as a result of ongoing weakness in gas prices.
Taken together.
We expect this strong international growth to offset any weakness in North America, keeping our full year ambitions intact with year on year growth in excess of 15%, which would support adjusted EBITDA growth in the mid twenties.
More specific to the second quarter.
Externally, we expect revenue to grow about mid to high single digits with operating margins expanding by 5200 basis points driven by seasonal rebound in the international markets.
We'd be laid by middle East and Asia area and continued momentum in the offshore markets.
Building on this we expect our second quarter adjusted EBITDA to reach new highs in this cycle further expanding the earnings off journey, we initiated 11 quarters ago, and taking another positive step towards achieving our full year ambitions.
I will now turn the call over to Stephane.
Thank you Olivier and good morning, ladies and gentlemen.
First quarter earnings per share.
<unk> charges and credits was <unk> 63.
This represents an increase of 29 cents or 85% when compared to the first quarter of last year.
In addition, during the first quarter.
We recorded a <unk> <unk> gain relating to the sale of all of our remaining shares in Liberty, which brought our GAAP EPS to <unk> 65 cents.
Overall, our first quarter revenue of $7 7 billion increased 30% year on year as the growth cycle continues to unfold.
This represents the highest quarterly year on year increase in more than a decade.
International revenue was up 29% year on year, while North America increased 32%.
Companywide adjusted EBITDA margin for the first quarter was 23, 1%.
In absolute dollars adjusted EBITDA increased 43% year on year.
As a reminder, our ambition is for adjusted EBITDA to grow in percentage terms in the mid twenties for the full year of 2023.
First quarter was certainly a strong start towards achieving these goals.
Yeah.
On a sequential basis revenue decreased 2%, mostly driven by seasonally lower revenue in Asia and Russia.
As well as lower Aps revenue in Ecuador.
Russia represented approximately.
Hi, Stephan.
Although our consolidated Q1 revenue.
Sequentially, our pre tax segment operating margins declined 178 basis points, largely due to seasonality and lower Aps revenue.
From a year on Europe perspective.
Drains expanded 298 basis point with significant margin growth increase.
Our four divisions.
Let me now go through the first quarter results for each division.
First quarter digital and integration revenue of 894 million decreased 12% sequentially with margins declining eight percentage points to 30%.
These decreases were primarily due to lower Ips project revenue.
And seasonally low world digital and exploration data licensing sales.
The Aps revenue decline was mostly a result of the pipeline disruption in Ecuador.
But temporarily reduced production.
And lower commodity prices impacting our project in Canada.
As a result of these issues.
Revenue declined year on year.
But this effect was more than offset by strong digital growth.
Including a more than 50% increase in our cloud and edge solutions.
Margins for the digital and integration division or expect it to improve in Q2 as the pipeline issue in Ecuador has been resolved and as digital sales will increase sequentially in line with the usual seasonal trend.
Reservoir performance revenue of $1 5 billion decreased 3% sequentially, while margins declined 207 basis points to 16, 1%.
These decreases were primarily due to seasonal activity reductions in Europe , and Asia and lower revenue in Russia.
You're on your revenue grew 24% and margins increased 291 basis points driven by strong growth internationally, both on land and offshore.
Well construction revenue of $3 3 billion increase.
Increased 1% sequentially.
While margins are 26% decreased 44 basis points.
However, you're on Euro revenue grew 36%.
While margins expanded 444 basis points with very strong growth across all areas.
On higher activity increased pricing and a favorable technology mix.
Finally.
Production systems revenue of $2 2 billion was essentially flat sequentially and margins declined 148 basis points to nine 3%.
Due to seasonality and the activity mix in Europe and Asia.
Year on year.
Revenue increased 38%, while margins expanded 217 basis points.
Driven by strong activity across all areas led by Europe , Latin America, and North America.
Margins also improved compared to the first quarter of last year.
Our supply chain and logistics constraints continue to use.
Now turning to our liquidity.
Our net debt increased approximately 1 billion sequentially to $10 3 billion.
During the quarter, we generated $330 million of cash flow from operations.
And negative free cash flow of 265 million.
Reflecting the seasonal increase in working capital, we typically experience in the first quarter.
This largely reflects the payout of our annual employee incentives and the buildup of working capital that will support our anticipated growth throughout the year.
Our second quarter of free cash flow is expected to be materially higher and to continue to increase into the third and fourth quarters.
Capital investments Inc.
Inclusive of Capex and investments in Aps projects and exploration data.
595 million in the first quarter.
For the full year, we are still expecting capital investments to be approximately $2 five to $2 6 billion.
During the quarter, we monetized our remaining investment in Liberty, which resulted in net proceeds of 147 million that.
We also spent $244 million.
Net of cash acquired on acquisitions and investments and no ground businesses.
The majority of which relates to the Giro data acquisition.
Finally.
We resumed our stock repurchase program.
And repurchased four 4 million shares during the quarter.
The total purchase price of $230 million.
We will continue to repurchase shares in the coming quarters.
As previously announced we.
We're targeting to return a total of $2 billion to our shareholders. This year.
Tween dividends and stock buybacks.
I will now.
So on the conference call back to Olivier.
Thank you Stefan ladies and gentlemen, I think we will open now the floor to your questions.
Thank you ladies and gentlemen, once again, if you have a question you May press, one then zero on your telephone keypad.
We go to the line of James West with Evercore ISI. Please go ahead.
Hey, good morning, John .
Olivier you and it's about you outlined kind of a.
Unprecedented quite frankly amount of contract awards.
The amount of visibility into the cycle and I'm curious as you talk to your customers now.
What you see as the durability.
Of those awards are given the global volatility in economies and and things of that nature.
The how are you thinking about the next several years. How are you guys are perceiving kind of the the steadiness of these contract awards and their ability to because if you do go forward, even if we were to have.
A recession or something like that.
In a way and how that would influence.
Your revenue and results.
No James Thank you I think indeed, I think we have a lighter than I think in my prepared remarks I.
Sure. The the view that are in the recent months and said in last quarter and I've been traveling and in Asia Middle East and South America, I've seen a customer I think taking commitments and are being ready to commit to the supply capacity into the partnership they need to deploy than developed assets are going.
As we believe this cycle is unique.
To as we said animal resilience better nature of investment at the all suite, including the long term capacity expansion committed in middle East are including the large long cycle elements that are growing in proportion led by offshore deepwater coming back.
The breadth I think everywhere. We go every jewelry unit is seeing a customer taking out to mobilize resource sometime for short cycle pushing enhancements most of the time for development commitment of assets in the he development expansion from inferior to a large scale development and durability.
He's a he's is certainly improving and duration of the cycle. I think is is improving as we see it goes beyond the middle East.
27 targets.
Targets of Pepsi expansion form for said that settled in the country all the country all targeting these towards the end of the decade and yeah, I mean, the city in Brazil blogging as an academician four 4 million bile.
By 2030, and I've already committed up to 'twenty S peso contact that will continue to build the pipeline of offshore activity subsea in park at all going forward. So I'm very I'm very positive about the the mix. If you like of a short cycle on production announcements do you <unk> to address.
The anticipated supply a shipper risk and the commitment long commitment.
The middle East from a deepwater and offshore operator.
To complement the long cycle is not to offset and not now take precedence over this short cycle and so Tim as we indicated of turning to the cycle towards international.
Offshore and meet the recent basket out so that that's where we are very confident.
Okay. That's perfect. Thank you and then a follow up for me in terms of pricing.
The international and offshore versus maybe North America, what kind of what you're seeing there in terms of.
But the level of concern or maybe not concern, but a level of willingness to pay.
Accept pricing increases it seems to me like customers internationally and offshore more looking at.
We're concerned about availability of service capacity, rather than what it actually costs.
Yeah, I think the we are seeing a pricing tailwind and we have seen pricing tailwind in the global market for for quite a few quarters and starting in North America. It does turn T International based on two things.
First indeed, securing capacity going forward, giving us, giving a considering the tight supply of equipment unique technology.
Getting a rough sense of urgency to cyclical impact on eliminating the complexity you have seen example, nine years contracting to the announcement, we made today and at the same time I think our performance matters.
Almost matters are two offshore.
Operator performance matters.
For first gas for soil and Theres essential Virgil C. G a T.
<unk> accelerated the cycle and this is one of the priority and the technology.
<unk> also makes a defense and is recognized and is driving a pricing premium so the combination of of supply capacity the combination of.
Our I would say our sense of urgency.
Fall and and.
And quest for performance.
Integration and takes news deployment, he's he's driving pricing.
Pricing tail winds that are setting us very well.
Great. Thanks Lydia.
Thank you.
Next we'll go to David Anderson with Barclays. Please go ahead.
Good morning Olivier.
Good morning, Dave.
So question on kind of the duration of this cycle and your core business well construction is obviously a big part of that I was hoping maybe you could talk about the pace of well construction that you see in front of US this year and where we should see the greatest uptick in activity in kind of the greatest shift in technology as well noticed that a marriage that north.
America was up 9% sequentially, which is a bit of a surprise, but where does that middle east ramp up fit in here and it can also kind of a similar question do we change that that's quite a question of capacity.
If I'm one of your customers what am I wrong. Most worried about today is it well construction was that kind of be I'd have to think basketball kind of towards the top of the list.
And if you can sort of couple of us understand that a little bit. Thank you.
Yeah, I know I figure you are correct I think the supply of high performance at coupons in the in the well construction domain.
He's on the stretch today and I think our we are working very closely with our customers to prior to rise it.
Creep Unpriced technology application and use integration use digital to help deliver the performance. The expected. So there is a there is a stretch indeed in this but going forward I think we are committing the resource when we see the returns are to be accretive.
So our margins in line with our expectation and ambition to continue to expand margins, so where we see the most activity clearly this year is an uptick and this will be the case as a country next quarter is in middle East and offshore in a combination of integrated contact we have in the offshore with relatively complex asset on occasion.
The demand is a lot of technology deployment.
And the intensity of activity in Middle East that day as a mix of short cycle.
Cycle and long cycle development project. This combination is unique and I think he's a it will be putting more resource more equipment more technology and new drive revenue fall up.
And what is the North America uptick was that off more offshore drilling onshore this quarter.
Yes. It was indeed, absolutely I think offshore is a is not only international asking of choice is that bidding in North America, and North America as a north East Canada.
Oh, sure and and and Gulf of Mexico, The combination of which is set to grow and our pace. This year. The we said our U S land.
And in North America land activity.
So we are we are also getting the benefit of our fit for basin.
Success in North America continues to hold and help us maintain and grow our share and and come on a premium on pricing.
And then Olivier in the DNI business.
Obviously impacted the performance this quarter I was wondering if maybe you could kind of pull back a little bit and help us understand how the digital business is performing I think the goals here at $3 billion revenue target was wondering if you can kind of tell us where we are now in terms of that run rate and in order to hit those targets. So I'm. Just curious is that about your existing customers using digital more.
Adding more apps to Delphi is it adding more customers all of the above maybe to help us understand a little bit more of a gerbil digital itself.
I think.
Indeed, but indeed, Dave I think a first in this quarter, obviously the growth and we have seen a growth rate in digital that is aligned with our expectation in line with our ambition to double revenue from 2021 2025.
We have seen as Stefan mentioned during his prepared remark that the new technology edge and cloud is growing at more than 50% continuing on the trajectory that you have said in the last couple of years.
We are aware and we're meeting with the team here they satisfied deployments and growing number of users. That's an axis then growing number of applications and that's where we want to deploy and go beyond.
Geoscience and our Petro technical suite, if you like to digital abortion prediction and distribution into the drilling domain automating.
The full definitely well construction process and again in our in the Boswell, we're very pleased to meet with like we know and and look after the big enough platform, where we're about to deploy for the first time in a world of fully automated top side too but on assembly.
Tomatoes.
Meeting ethylene.
Autonomous digital journey.
We will realize this year. So we have both the geoscience application deployment, the digital operation and we have new customers coming in and you have seen some new contracts that were announced this quarter. So.
We are going to the pace, we were expecting to be on a trajectory to double and in this quarter. This was unfortunately masked a fully.
By the Aps setback.
But we expect these to resume and to be actually one of the leading our growth sequential that you did see in the second quarter.
Fantastic. Thank you.
Thank you.
Next we'll go to the line of Chase Mulvehill with Bank of America. Please go ahead.
Hey, good morning Olivier.
Great question, Good morning, I guess coming back to international and just kind of focusing there we get questions.
This international ramp and yeah, because the last six months, we've seen some oil price volatility we've seen a couple of OPEC plus cuts.
And so we can kind of get a lot of investor questions. If theres been any signs.
Of OPEC slowing down any kind of planned product projects or capex plans.
Yeah, Let me just ask you if you've seen any indications of.
Of OPEC plus members.
Slowing things down at all.
In the Middle East.
No we have not seen it we have not seen any any impact of this decision and we don't believe there will be any and we believe that these are companies and industrial companies are really set and fully focused on mobilizing resource to execute their very ambitious the capacity expansion plan.
Thank you all the commitments and it's not only a UAE and Saudi.
This is across so many countries and GCC and I think this is to grow both oil.
Capacity and also gas in commercial and commercial gas across the region. So if he either.
I've been recently in the Middle East and I have not seen any sign of a of adopting and challenging and again the multiplicity of a contract award that we are.
That were tendered in last the last 18 months and most of them are multi year, if not beyond five years are really indicative of the commitment and capacity expansion plan that I've started infection is happen and you'll see this a growing for the rest of the year. So we don't we don't foresee any any impact.
Okay also I appreciate the color there.
The follow up is really kind of OCC U S. You had a lot of announcements in your press release.
Really highlighted your experience on the sequestration side.
But there are other parts, obviously of the value chain.
And are there other parts that you would actually think that would be a good fit for us it'll be like possibly.
Capture technology side.
No absolutely I think we have a need.
You can write off play into the sequestration debt, that's being <unk> translate into significant into both studies.
And services and then modeling in digital that you have provided to you.
Do you have a lot of customers and these customers approach us to put space some of them in meters that are non oil and gas as you have seen some of the example, we gave in the press release earlier today.
Do you have a lot of customers and these customers approach us to put space some of them in meters that are non oil and gas as you have seen some of the example, we gave in the press release earlier today.
And then we are using our <unk> technology, and innovation capability to explore and to invest into capture technology or to partner.
We are partnering with Linda.
Into the application of Ccs project of course, Oh close the domain of a blue allergen and and ammonia for Decarbonizing, the natural gas ammonia and Hello agenda production. So we are indeed, so shading all investing into capture technology, hence broadening our scope.
Beyond sequestration and using our right of way to expand and create a business that we stand on its own in the years to come.
Okay Awesome I appreciate the color there I'll turn it back over thanks Olivier.
Thank you chase.
Next we go to the line of Al Rune diagram with J P. Morgan. Please go ahead.
Olivier I wanted to get.
Some insights on what you're seeing within the subsea segment of production system.
I think you highlighted you know broadly within production systems, and a $10 billion to $12 billion of backlog growth potential this year our bookings potential.
I was wondering if you could maybe characterize you know S. L based technology offering and integration capabilities relative to your peers as well as to provide any update on the strategic transaction that yet.
Plus summer.
Yeah, Let me, let me take it at the level of pollution system first and let me give you a quick <unk>.
Zoom, so the booking without thinking about is that the pollution system level, which is a division and capacity.
Pollution system equipment capability from from subsea as you pointed out from actually in well completion, and well actually lift subsea still face sustained processing.
Capability. So when you put all of these together you get an end to end from pull to process from phase two to processing that is quite unique in our integration and delivery capability. Hence the opportunity we have two paths at scale and be a provider with our partner subsea seven into the product of GPO debt.
You heard about who are the first gas to fly out was realized yesterday and celebrated by the Ah in.
In country and this is quite unique so that's detail should it we have a we have end to end integration and Cam.
Liability, we can design and deploy and develop a gas facility and we have done it in the past and we can link it to with our partners to our subsea development and Thats paid to the completion architecture. So these end to end is quite unique and gives us a bunch of new pets a bit at the large scale into development now very specific to subsea I think we're also quite.
<unk> shut it into the way that we can connect to the sub surface and we have this integration capability from the slip into the to the completion architecture and one team basket that I would like to highlight two things first is the ethical capability electrical capability of transforming.
This subsea trees, the subsea control in the subsea and well completion controlling two electric fully electric capability. This is a game changer for the deepwater industry game changer for low carbon and control digital control of subsea equipment and control of absorb expanding.
In completion. This is very much again the case in Brazil, we're very fortunate to have a established here a unique center of excellence and we are on the sponsorship and be working with you.
Multiple operators that have joined us into a joint development program, where we are deploying and will soon deploy everything from subsea tree to safety valve to flow control, while fully electric that we changed the game and critically creating a new step. So that's differentiated you have a differentiated view sees a processing boosting.
Processing capability you remember the the award that we got last year into a into a shell for gas processing subsea equipment into a large installation in the and you have seen too.
I will this quarter in Brazil, a lighting are boosting capabilities are unique in that position and again, our ability we have to integrate.
Assessing coupon subsea with the rest of equipment well also face is unique and that's something that is adding to our digital capability as well so when it comes to the to the.
Announced J D. I think we're seeing the process of going through the.
Regulatory bodies in different part of the world. So I cannot comment any further than what you come up that area. This is an exciting outlook extending opportunity, but until close we will we will move forward.
Great and my follow up you and the board are in Rio. This week I was wondering if you could characterize what you're seeing on the ground in terms of the upstream spending picture.
And obviously we've had a.
Regime changed recently with the New administration are you seeing any potential changes to the physical a regulatory regime that could impact spending over the next couple of two or three years.
Well if anything this visit does been up Sunny I was studying for the bold all studying for engagement with customers and key highlighting the potential.
Of of Brazil to be fulfilling a significant supply growth in the future as I said N P and in Brasilia as ambition to reach or exceed 4 billion bile from treatment free today.
Today, I mean on bile per day, and they have already laid out the foundation of diesel both pollution and hence spending to the metro basing the Campos basin of the land basins and accelerating continue to accelerate the development of the sub salt deepwater with up to 20 S DSO already into the into.
Into the play so I think they also are pushing forward to the next one year. They are about to explore equatorial margin that gives us another leg. If you like of Brazil growth in the future beyond the beyond the already committed mid tier.
SP. So contract that are in place. So we don't see any change if anything you see an acceleration in <unk>.
And the extension of the duration of this Brasil outlook and and if I had to highlight one one noticeable change that I've seen a commitment to decarbonize, our commitment to digitalize and that I think are easier than you are at the leadership. He's a he's recommitted to and we have seen it and we will you will see it in.
The future digital operation with accelerating Brazil by the main operator here and the country will accelerate this can rebound to Ccs.
We are very fortunate to be on the first and only bioenergy Ccs project in Latin America with Byron.
Byron AGL and we met we met the team.
Two days ago, and they have a pizza place, we're making a decision product in Brazil. So you will see more and more activity.
No slowdown, but any upside only upside to.
To the to the offshore environments and then.
And low carbon and digital transition accelerating as well.
Great. Thanks for the detailed comments.
Thank you.
Next we go to Neil Mehta with Goldman Sachs. Please go ahead.
Hey, good morning team first.
First question was.
Round cash flow and working capital specifically it was a bigger outflow than we had modeled in the quarter. It does that all reverse over the course of the year and you could talk about some of the moving pieces around that.
Sure. So so yes. It does reveal says as you know Q1 is always the.
The lowest quarter of the year of our free cash flow as mentioned, we have the typical working cap build up.
Particularly we have the payout of annual employee incentives. This is a one off it was about $500 million in the in the first quarter and then we build our inventory for anticipated growth, particularly in the <unk>.
Production system Division run, though as we've mentioned so.
Even though it was it remained negative the free cash flow actually came slightly ahead of our own expectation or DSO was the the lowest historically for the first quarter. So we were quite happy with that so yes. It will increase in AR in the second quarter and it will accelerate in the second half.
On higher EBITDA continuous capital discipline and working capital unwinding.
Keeping in mind, we typically generate the majority of our annual cash flow in <unk>, but it will increase materially in Q2. So when you put it all together the 2023 full year on free cash flow will be significantly higher than last year and clearly on the trajectory to deliver on the 10% free cash flow margin.
We committed for the 2021 to 2025 period.
And two just to close this will allow us to as Olivier mentioned and as I mentioned in my prepared remarks to return $2 billion of AR to shareholders in the form of dividend and buybacks together.
No. That's that's that's really helpful that it's a follow up is just a the margins that digital.
I think it is it's hard.
To isolate because of some of the volatility around Aps can you give us a sense of how you're seeing the underlying margin trends at the core digital business and in Q2 that segment margin margin progression I would imagine strengthens us as you worked through some of these Ecuador challenges.
Yeah.
A reminder, for everyone. I think these two line integration Division I think comprise and combined digital and exploration that are with asset performance solution. So at the onset of a digital journey, we had set clear ambition biodiesel margin to be highly accretive to SMB and sometimes <unk> had a growth.
To double our revenue from 21% to 25, we are in that journey, and clearly delivering a very accretive margin to us.
So now we are demonstrating the last few quarters last year that we when we leverage our best performance in Aps and defense showed a digital offering we deliver yet I imagine visibly in excess of 40% now.
Notwithstanding similar set back as we add metal sit back and if yes ambition because they're not as a combination is to continue to deliver a highly accretive margin certainly in the <unk>. So going forward do you expect the emergence of DNI to sequentially improve based on the very solid.
Revenue growth from digital and they are accretive margins for digital combined with low return and of growth for Aps and returning a decent margin for Aps. So as the world, we expect to see not only roubini, Greece, but margin expense.
And sequentially and to continue to be accretive highly accretive for the rest of the year.
Alright, great. Thanks team.
Thank you. Thank you.
Next we go to the line of Scott Gruber with Citigroup. Please go ahead.
Yes, good morning.
Let me start and Olivier Good morning morning, Olivier you mentioned, a resurgence in exploration, which is great to hear for S. There'll be one concern out there, though is that potentially limit number of experienced geologist.
So across the customer base to prosecute the exploration programs, just because you know J&J departments, where well definitely scaled down to the pandemic.
There's a legitimate constraint on the strength of the exploration cycle, whereas this capability to be a rebuild across the industry. What are you seeing on that front.
No I will not be overly concerned by this I think are the two factor that are playing into this but first that are digital I think he is adding a significant a significant a productivity gain.
Processing, and analyzing and generating prospect as we call. It from some for modeling from structural modeling to your prospect identification.
Seismic data set as well.
Capability.
To process using digital capability significantly improved so the.
The ability to to create spotlight on the on the gas find all the oil pools are seeing is better than it's ever been and so did much better than last cycle and civil neat thing days of Sydney to counter service consulting capability that we bought spill into that can help complement and provider.
Support to our customers, but as we said digital productivity technology and that is improving and gave a high accuracy better geology interpretation capability better structural modeling from seismic to two wireline and to our modeling or to sampling like.
Or because of something technology, all combine to give a significant support to the <unk> team of our customers and not a not a slowdown, but actually accelerate and and and and improve the productivity and ability to generate prospects. So I'm not concerned and I believe that you will see the disc.
Suspect to be fast tracked from from exploration to appraisal to development going forward.
No that's great.
Just how would you compare the strengths of this exploration cycle, yes of those of the past.
Is the trajectory trending us back towards that 2000, 2011 to 2014 period.
We can possibly get back to the mid to late two thousands levels.
Tieback opportunities are concerned they are different.
Color on the potential strength of the exploration cycle relative to the history would be great.
So I think I would I would contrast, it more by seeing the type of activity and exploration is happening and I think there are a lot of near field exploration as it is called a backyard exploration that is being used by the most operator.
Jane Ah.
Access.
Critical a critical asset critical basin.
Or advantage advantage assets and they want to explore and do near field exploration costs and beyond and you stay back. So there is a lot of exploration happening across every basin major basin.
Is that a cocktail is a decent has been this trend has been going up and this trend has said that he is different from the and again feel that frontier exploration that characterize maybe the last cycle the last last cycle.
Well this cycle I think beyond.
The near field exploration, we are seeing a return of of frontier exploration.
Driven by energy security driven by the desire to replace reserves and to secure new a new gas, particularly and we see it happening across cause many basins.
You mentioned before the quarter.
One you heard about the V C.
Continuous exploration, which is almost becoming a near field exploration of course, because Vienna, but if she goes you go across the Atlantic you'll find a lot of exploration happening in the in the South part of Africa, but gave some some huge success for two or three operator into a media that are here.
On the on the onset of something that could be very significant for the industry and oil development and then gas in east Med I think has been developing and you heard about the development that we have fast track.
On the Black Sea and was also a guess so security is a is incentivizing people to to invest and and and and operator to invest into certain region with.
Access to two of the the demand market and near field. He's continued to to go very well. So in combination. It is different from the past and I will not try to compare escape.
30 of these exploration and the diversity of our customers any double basin is quite unique and is really accelerating this year.
I appreciate the color. Thank you.
Thank you.
Next we go to the line of Roger read with Wells Fargo. Please go ahead.
Yes, Thank you and I imagine good afternoon in Rio.
Maybe just to come back to the exploration appraisal kind of question you mentioned that.
Earlier slowdown in North America, offset or more than offset by what's going on in <unk>. So I was just curious.
What.
And I think you also mentioned it is materially improved the last couple of months. What do you think really has led to this increase in eni because it's not as if commodity prices were good in 'twenty, two right and they haven't been.
You know something exceptional thus far in 'twenty three so is it a is it a change in just how your customers are looking at their future inventories or is there something else there.
It's helping to drive this improvement.
P M D.
The energy security.
The supporting our commodity price outlook.
And they and the desire and need to go and leverage the cycle.
To explore and anti tie back.
Our reserve to the existing advantaged basin, all too fast I guess or new oil pools as it is as I described earlier now the timing of it the acceleration I think is linked more to the availability of and a compacting of deepwater rigs all the contracting of rigs offshore.
Land on some occasion when it is when these exploration is happening more than a modern and she has been the cycle as it did last year of your in every town is accelerating in line to some extent with the offshore acceleration and I think it will be part of the mix and we will give you an opportunity to extend and cut a new leg of activity in it.
The leg of F I D.
In two or three years. So Nam windows are those exploration will have been appraised and will be a friday at that time, So I think it's more.
It's a it's an underlying trend that started in the last few quarters and it accelerated.
And I think that is a more long long long view that gets them up taking and not looking at the short term uncertainty or shop timbre accommodate surprised by Asian and committing a on one new basin are committing on the expanding near field exploration. So that that's the way we have seen it.
Okay. So maybe just the natural evolution within a cycle manage things get some duration you would expect exploration to pick up.
One other question for you just Aps. So obviously you know kind of highlight it had had some issues you know looking.
Looking back over the last couple of years, there's been talk of potentially disposing of these assets or at least not investing in them aggressively I was just curious it seems like M&A has picked up or at least talk of it within the E&P sector. So.
More likely less likely same two to look for a way to exit these assets as you go forward.
So so look our rojo it on Aps, we really have to distinguish Ecuador. These are service contracts.
Based.
There's no our intention to exit and we do need to maintain a minimum level of investment, but dressed or through on these projects are highly are positive in terms of not only earnings but cash flow are the Canada. So it is a bit different this is a pure equity position and.
It's also very accretive in terms of cash flow even that are at current commodity prices.
And as you know we run the process on that particular set of last.
Last year, we were not satisfied.
We view referrals, we receive so at the moment. We are we are happy with we are getting that asset and AR and the cash flows it generates but if if one day there is no for the right price.
Certainly consider it.
Okay I appreciate it thank you.
So.
Ladies and gentlemen, I think too I don't want to give a close to deserve to destroy its almost to the hour.
So to conclude today's call I would like to leave you with the following takeaways.
First the quality of the unfolding upcycle in oil and gas is improving with unique attributes of resilience breadth and duration.
This is very much evidenced by the strengthening outlook in both middle East and offshore markets and further reinforced by the tight supply balance as demand forecast approach new eyes at year end second our swung settled a year gives us further confidence in our full year financial ambition.
Suddenly the dynamics international market would likely offset the motivation of activity growth in North America. In fact, we are witnessing a gradual shift from short to long cycle of investment and a further transition to international with both effects closely align with our strengths and paving the way for an exciting outlook for years.
To go through.
Third our over performance demonstrated the strength of our portfolio focus on the most attractive and because you don't market six months globally, both in oil and gas and low carbon solutions.
Visions continues to align with customers most priorities on value delivered through performance and integration with digital transformation and decarbonization as industry mandates. Additionally, pricing continues to trend positively, enabling us to extract more value for our product and services as a result, we.
Our firm ambition to further expand margins as the cycle unfolds to grow earnings to new levels in the cycle and two seem to be drilling trees returns to shareholders as well as demonstrated this quarter.
And very confident in the alignment of our strategy to pharma to trends in the energy market and fully trust team to continue our path.
In this context.
Before I close I want.
Two announce that AR and the <unk> imager, we'd be moving to a new carrier partners Saturday. After all of them are cable stance in his position as Investor Relations VP for the past three years. Thank you Andy for the support and positive engagement with our investors and market analysts.
He blessing Andi is James Macdonald, who is transitioning from his previous role as I make us land based in President welcome James.
With this I wanted to close the close today's call and wish you all the best Thank you good day everyone.
Ladies and gentlemen, this does conclude your conference for today. Thank you for your participation you may now disconnect.
Yeah.
Okay.
Yeah.
Conference recording has stopped.