Schlumberger Limited (SLB) on Q3 2021 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, thank you for standing by and welcome to the Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, there will be an opportunity for your questions and instructions will be given at that time. As a reminder, this conference is being recorded. I would now like to turn the conference over to the Vice President of Investor Relations, ND Maduemezia. Please go ahead.
Nd Maduemezia : Thank you Dear. Good morning and welcome to the Schlumberger Limited, Third Quarter 2021 earnings conference call. Today's call is being hosted from Schlumberger dole recent center in Boston. Following the Schlumberger Limited board meeting held earlier this week. Joining us on the call, are Olivier Le Peuch, Chief Executive Officer and Stephane Biguet, Chief Financial Officer. Before we begin, I would like to remind all participants that some of the statements we'll be making today are Forward-looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. I therefore refer you to our latest 10-K filing and our other SEC filings.
Operator: Our comments today may also include non-GAAP financial measures, additional details and reconciliation to the most directly comparable GAAP financial measures can be found in our third quarter press release, which is on our website. With that, I will turn the call over to alleviate.
Olivier Le Peuch: Thank you, Andy. Good morning, ladies and gentlemen. Thank you for joining us on the call. In my prepared remarks today, I will cover 3 topics. Our first quarter results, our view of the and the exceptional growth opportunity ahead of us. I will then share some insights on the Middle East and offshore markets and finally a first view of the 2022 golf outlook. Stephane will then give more details on our financial results and we'll open the floor for questions. The first quarter results further emphasize our returns focus, consistent execution, and the advantage mix of our portfolio. Growth momentum was sustained and we delivered a fifth consecutive quarter of margin expansion, achieving the highest pre -tax operating margin since 2015 and cash flow from operations in excess $1 billion. Let me share with you some performance highlights from the quarter across our core, digital, and new energy. In our core, first margin expansion was led by well construction and our performance where we fully seized the sequential growth opportunity driving operating margins in both these divisions, both meeting their highest levels in the last 3 years were really quality improved to boosted by favorable activity mix and higher new technology uptake that delivered strong margin expansion. Second, internationally, we record a growth in all three areas with revenue up 11% year-on-year, consistent with ambition of double-digit revenue growth compared to the second half of 2020. International margin further expanded exceeding pre -pandemic levels and are at the highest since 2018. In North America, Ravinia growth was sustained, albeit impacted by transitory supply and logistics disruption. Margin also continued to expand with operating margins firmly at the position. Finally, we are pleased with the very size-able activity pipeline secured during the quarter, the competitive tenders, direct awards, and compact expansion, some of which include net pricing improvement. Bringing in our differentiated performance, integration capabilities and technology. These wins enhance our market position a long of activity and a platform to further our new technology adoption and digital deployment, strengthening our leadership as we enter an exceptional growth cycle. We are delivering on the promise of our performance strategy, which is increasingly impacting our top and bottom line results, both North America and internationally. As the cycle accelerates, we'll leverage our advantage platform to capture the exciting growth and outperform the markets in our core going forward. Moving to digital, we continue to progress our platforms, happy digits quarter, expanding our offerings to the acquisition of independent data services, and strategic investments in DBQ to further advance our digital technology offering and the adoption of AI solutions in our industry. In digital production operations, we announced a partnership, ivivva, to expand powerful Edge and IoT solution to the feed, complementing our ago, our platform and Senseo solutions. And the digital driven, we successfully completed the first fully automated section drip offshore at the Hebron platform for ExxonMobil in Canada as you have seen in this morning's earnings release. These achievements is a significant step for our industry, particularly offshore, and signals a momentous opportunity to apply digital technology to create a step change in web construction, safety, performance and carbon footprint. As shared recently, we are seeing the adoption of digital solution accelerate in our industry. And whilst we are in the early innings, we're excited about the prospect of conditioning the majority of our software. Customer base of over 1 thousand companies to have these 2 platform during the next few years. This growing adoption, which generate an expanding set of digital royalty streams of our , as we condition every customer to new digital solution for the data workflows and operations. Moving to new emerging, we advanced our portfolio by ticking a position stationary energy storage to our strategic investment in Avenue. A Company with detailed shut detail shared at middle technology. This represents a new opportunity set and an expansion of total addressable market in the sector with significant growth opportunities. Geo energy following the success of the pilots in our technology facility in France, since you synergy a secured five commercial contracts in Europe. This is a significant achievement in the commercialization roadmap for as a low carbon solution for heating and cooling buildings, contributing to global reducing emissions. To conclude on this quarter performance, we once again demonstrated excellent progress in our strategy execution across our portfolio, supporting outstanding results. And I want to thank the entire team locally for delivering another strong quarter, but for their unwavering efforts to create enduring value for our customers and our shareholders. Now I would like to turn to the near-term and growth opportunity ahead of us. The market has improved activity throughout 2021, especially over the last few weeks, we've put gas price, attending risks on highs. Inventory at their lowest level in recent history. A rebounding demand and encouraging trends in upon them be competing at defaults. This strengthening industry fundamentals, combined reduction of OpEx Plus and continued capital speed North America assemblies measure prospect of an exception mid year will offset cutter head. In the international markets, all regions are set to benefit from this favorable environment, something not seen internationally since the last . This expansion will occur at different -- across different , operating environments, and customer groups in a sustained multi-pronged growth cycle. Our broad exposure across these different dimensions put us in an advantage position to fully seize this growth opportunity. For example, this growth inflection is already visibly underway in Latin America, sparked by the resumption of exploration and utilization of long-cycle development . Activity has strengthened throughout 2021 and we're bringing this market is already at 2019 pre -pandemic levels. Year-to-date revenue growth North America is at 30%. We brought activity growth across multiple countries, including Argentina, Brazil, Ecuador, and Peru. This growth is expected to strengthen further in the coming years due to ongoing long-cycle development campaigns. By contrast, in the Middle East were activity has been more subdued in 2021, the market conditions are set for much of uptick of activity in the coming quarters. The combination of short-cycle activity to meet supply commitment, strategic old capacity expansion, and the acceleration of gas on projects, we reserved in a significant increase in investment throughout 2022 and beyond. Our recent success in tender awards, as detailed in our earnings release, strengthened our market position and with our strong presence and commitment will benefit the most from this exciting outlook in the region. In the offshore markets, we're also set for a strong resurgence this cycle, rig activity grew for the third sequential quarter internationally, and is expected to build a notable increase in development FIDs in the coming years. Advanced in new technology, digital integration at driving performance impact of impact offshore -- from discovery to well construction, production, and recovery -- and are creating the conditions for offshore operators to reinvest with confidence in this cycle. North America, the minimum resumption of resets in the Gulf of Mexico, where we have significantly Market present, would drive additional offshore growth as Operator capitalized on the advantage of this policy basing and its existing takeaway infrastructure and extract more value from the core upstream position through exploration and tie-backs. Taking these factors together a broad offshore resurgence reserved from IOCs, brooding on debt advantage helps independent fast hacking development of the recently acquired asset and NOCs. And looking at gas and oil reserve recovery potential. Our technology digital in development and integration capability are critical advantage in this market environment, and that has significant new contract awards, both internationally and in North America. Finally, we're extremely pleased for our customer reception of our Transition Technologies portfolio, and the accelerated adoption of this technology that reduce the carbon impact of oil and gas operations. This portfolio is focused on fugitive emissions, flaring, and electrification, and is already helping customers decarbonize operation, advancing our net zero ambition and strengthening our sustainability leadership in the industry. Some example of this impact as cited in our highlights. Turning to the fourth-quarter outlook. Directionally, we anticipate another quarter of growth with ambition for growth across all divisions. Growth will be led by Production Systems and Digital & Integration, benefiting from a year-end sales uplift compared by typical seasonality construction. This should result in an overall sequential growth rate similar to the prior quarter. With this fourth quarter outlook, we expect to reach up double-digit international growth ambition for the second half of 2021, when compared to the second half of 2020. It will also translates into full-year revenue growth, both internationally and in North America after adjusting for the effect of divestiture. Brigham third quarter operating margin on recent highs. Our ambition is to sustain this level of margin performance in the first quarter. Consequently, on a full-year basis, we remain confident in attaining the of our guidance of 250 to 200 bps EBITDA margin expansion and mix on the foundation for expansion in the year ahead. Now I would like to close my prepared remarks with our earliest view of 2022. Against the backdrop of the constructive environment I described earlier, our confidence in the onset of an exceptional growth cycle is reinforced. At this early point in the planning cycle, and of setback in economic and political recoveries, we anticipate very strong global upstream capital spending growth. This growth would impact all , every operating environment, short and long cycle activity, and all customer groups. In North America, we anticipate capital spending growth to increase around 20% impacting both the onshore and offshore markets. Internationally, growth momentum was strengthened and early indications point to strong capital spending growth in the low to mid-teens, driven by both short-cycle activity and the onset of multi-year capacity expansion plans. Through our performance strategy, we have strengthened our position across multiple dimensions. In North America, we have enhanced our market position and are now biased to accretive growth onshore and would benefit from strong growth offshore in the Gulf of Mexico. And in the international markets, we have built a multi-year pipeline of strong activity in the most prolific basins that will lead the supply response, both in oil and gas.. More importantly, we've enhanced our earnings growth potential significantly as demonstrated by multiple quarters of margin expansion. In North America, operating margins are primed to exit the year at the highest level since 2015, which combined with the fiber market position as Jeff (ph) just described, is an excellent platform for margin expansion. Internationally, we also set for peer-leading margin expansion as we exit 2021 with margin or both pre -pandemic levels. The combination of selectively growth and operating leverage will support durable margin expansion. Additionally, to our fit-for-basin in and transition technologies and capacity tightening, we see favorable condition for broader net pricing, net gains in the coming years in both North America and the international markets. Finally, as a result of our these two platform strategy and growing customer adoption, we anticipate an acceleration of our digital journey resulting in active deep revenue and earning growth. Consequently, we expect margins to expand further in 2022, supporting material earnings, growth potential and are increasingly confident in achieving our mid-cycle adjusted EBITDA margin ambition of 25% or higher and sustaining a double-digit free cash flow margin throughout the cycle. I will now pass the call to Stephane.
Stephane Biguet : Thank you, Olivier, and good morning, ladies and gentlemen. Third quarter earnings per share, excluding charges and credits, was $0.36. This represents an increase of $0.06 compared to the second quarter of this year, and an increase of $0.20 when compared to the same period of last year. In addition, we recorded in the first quarter of $0.03 gain relating to a startup Company we had previously invested in. This Company was acquired during the quarter and as a result, our ownership interest was converted into shares of a publicly traded Company. Overall, our first quarter revenue of $5.8 billion increased 4% sequentially. Pre -tax operating margins improved by 120 basis points to 15.5%, and have now increased 5 quarters in a row. Margins expanded sequentially in 3 of our 4 divisions, with very strong incremental margin in both reservoir performance and well construction. This performance was due to a favorable geographic mix driven by continued international revenue growth, as well as a favorable technology mix. We've increased exploration and appraisal activity and new technology adoption. Company-wide adjusted EBITDA margin of 22.2% in the quarter increased 90 basis points sequentially. It is worth noting that this margin expansion was achieved despite the well-documented disruptions in global supply chain systems, and inflation in select commodities and materials, as well as in logistics. Through our global supply chain organization, we are successfully engaging with our suppliers and customers to jointly navigate inflationary trends. We are collaborating with our customers to optimize planning, and where applicable, make the necessary adjustments for existing contractual clauses on negotiation, As a result so far, we have largely been able to shield ourselves from the inflation effects. As the growth cycle accelerates, we will continue to be proactive, dynamically adjusting sourcing strategies, and leveraging our diverse global manufacturing footprint and supply network. Let me now go through the fourth quarter results for each division. First quarter, digital and integration revenue of 812 million was essentially flat sequentially as lower sales of digital solutions were offset by higher EPS revenue. Pre -tax operating margins increased a 154 basis points to 35%, largely as a result of improved commodity pricing in our Canada EPS projects. Reservoir performance revenue of 1.2 billion increased 7% sequentially. Its revenue growth was entirely driven by higher international activity. Margins expanded 202 basis points to 16%, largely due to higher offshore and exploration activity, as well as accelerated new technology adoption. Well construction revenue of 2.3 billion increased 8% sequentially due to higher land and offshore drilling both internationally and in North America. Margins increased 230 basis points to 15.2% due to the higher drilling activity and a favorable geographical mix. Finally, Production Systems revenue of 1.7 billion was essentially flat sequentially, while margins decreased 27 basis points to 9.9%. Now, turning to our liquidity. Cash flow from operation was once again strong as we generated 1.1 billion of cash flow from operations and free cash flow of 671 million during the quarter. This represented a significant sequential increase when adjusting for last quarter's exceptional tax refund of 477 million. We paid $42 million of severance during the quarter. Excluding these payments, the working capital impact on our cash flow was neutral despite the revenue increase. This was driven by a very strong DSO performance. We expect the fourth quarter to show another quarter of strong free cash flow generation, which positions us favorably to achieve our ambition of delivering full year double-digit free cash flow margins. As a result of the strong cash flow performance, net debt decreased sequentially by 588 million to 12.5 billion. During the quarter, we made capital investments of 399 million. This amount includes Capex, investments in EPS projects, and multi-clients. For the full-year of 2021, we are now expecting to spend approximately 1.6 billion on capital investments. In total, during the first nine months of the year, we have generated over $2.7 billion of cash flow from operations and $1.7 billion of free cash flow. As a result, we have enabled to progress significantly on our commitment to deleverage the balance sheet. This is evident by the fact that gross debt has decreased by almost $1.5 billion since the beginning of the year, net debt has reduced by 1.4 billion during the same period. Overall, I am very pleased with our cash flow performance and the progress we are making towards strengthening the balance sheet. This will provide us with greater flexibility in our capital allocation. I will now turn the conference call back to Olivier.
Olivier Le Peuch: Thank you, Stephane. I think we are ready for the Q&A session.
Operator: Thank you. Ladies and gentlemen, . One moment please for the first question. And our first question is from James West with Evercore ISI. Please go ahead.
James C. West : Hey. Good morning, Olivier.
Olivier Le Peuch: Good morning, James.
James C. West : So Olivier, 5 sequential quarters in a row of margin growth and really strong execution. How do you think about or how are you considering planning for continued strong execution as revenue source to really accelerate as we go into next year?
Olivier Le Peuch: No, thank you, James for the question. Indeed, we're very, very proud and very satisfied with the last 5 quarters. I think we have demonstrated our ability to leverage restructuring, portfolio migrating, and the foundation of putting place doing this reset we have avoided in the last 18 months. But furthermore, I think the -- looking forward as the cycle will unfold, I think there are 2 or 3 characteristics that will play favorably, and that will help us continue to expand the margin as we have seen in the last quarter. So first, I believe that the market outlook will create favorable market environment, exposing the bases where we have strong position internationally and in particularly Middle East offshore as I commented during my prepared remarks. Secondly, I believe that performance still matters and will matter increasingly, hence our technology offering , Transitioned Technology, and Integration capability will continue to make a huge impact and will create a premium for service in both Well Construction, Reservoir Performance, and Production System. Digital, we see an acceleration going forward as we have seen that we have continued to evolve, progress, and mature of these two platform strategy and we're in the last innings of developing this strategy on the platform, on the foundations; hence we are now seeing increased adoption and acceleration and we expect, as I just shared earlier, that this will be encouraging that to growth and earnings going forward. And finally, as the revenue as the activity both internationally and in North America will increase. This will tighten the market and create condition for pricing. So when you combine these favorable market exposure, the we have, the that give us a premium and a performance integrated contact with digital. We have the formula for supporting our ambition for 25% or higher EBITDA margin by mid-cycle.
James C. West : Right. Okay, great, that's very helpful, Olivier. And then, Olivier, a follow-up on that, on the digital side. This will be the first cycle where we really see digital as a big part of the business. There's been as you allude to widespread adoption will be happened yet to the growth cycle with that adoption. How do you think that plays out? Is it going to allow you, obviously, margins will be part of it? That there's a lot of you to grab more market share. What are the -- what does digital do in an upcycle that is essentially a strong one like we're projecting?
Olivier Le Peuch: I think I would highlight three things that will -- we have reserve our success in investment and leadership Firs obviously, the acceleration of diesel by customer through workflows, data and digital portion offering. And we are element of this being announced every quarter and we will continue to see this on across the different customer groups and different. As there were a piece of this, will mean acuity growth in 2022 to our topline by the digital offering, we have. The cycle aspect, is the loan term effect beyond the cycle. I believe that the effect is -- certainly will last causing the very significant size of our customer portfolio. The fact that customer are going into it over the long run, we are seeing multiple effect of revenue stream being deployed across multiple quarters and multiple year across the different customer group we're addressing. And finally, this is generating margins fall through to earnings and will be continued to help us operate at above 40% of maturities. And also will result in our ability to from digital operation on our own operation partnering ticketed performance, in well construction was our performance. The ability to more efficiency and hence to expand and support margin expansion on those divisions.
James C. West : Very good. Thanks .
Olivier Le Peuch: Thank you.
Operator: Our next question is from David Anderson with Barclays. Please go ahead.
J. David Anderson : Hi, g good morning. Want to ask you a couple of questions about the unconventional contracts that you announced in Saudi and Oman. Could you just help us understand the pricing mechanism? Is there -- are these lump sum? Is there a baseline of stages per day? And also, just curious where you're sourcing all these equipment, do you have all these equipment? Does it require capital? Just to a little bit more background on these contracts, please. Thank you.
Olivier Le Peuch: I think this contract, a large integrated contract that we have been winning in our position based on performance, demonstrated efficiency, and ability to deploy technology that make an impact on execution. We do have the capacity in place. We have demonstrated to pilots and all of the engagement that we have before that we could deliver the equal performance that the customers are expecting. And we have party that come in and we demonstrate during the last few years that we have improved ability to engage these operation and walk as customer to get this integrated compact or other to be performing. And they're having the margins and earnings we need. We'll continue to from these contactable, their products time. So we are very proud of winning those contracts they are based on performance, they are based on technology and our team on the ground. They have done a great job of them saying we could take these contract and get ready for customer and for ourselves.
J. David Anderson : And then in terms of the equipment required, do you need to add equipment? Do you need to build out at all?
Olivier Le Peuch: No, we have set it to mobilize these equipment so that we have already in place. And obviously, this will pull equipment from a place where we had, but we have to keep on in place. And when I will to develop. Pulling upon the committed contract, we are we're taking on both online and in site.
J. David Anderson : And so my other questions are rather offshore. Your seemed to be a bit more optimistic than most on the offshore market, you announced these several awards recently. Are you confident enough to say we're at an inflection point you think in offshore spend which I would think would be quite to your margins with higher utilization while sub-seeing? Also all the technology you have in well construction , you also mentioned digital as well. Could you just talk a little bit about maybe how you're seeing this unfolding over the next year or so?
Olivier Le Peuch: Yeah, I think, I remain constructive about the offshore environment for a couple of reasons. First, because these offshore environment has been strengthening steadily for the last few quarters, and that's been the -- the activity has been increasing lately, and I think we have an the offshore international market gold been going in the mid-teens, year-on-year and in . So that's a proof that this activity translating into revenue opportunity. And I think the offshore markets, both internationally have been growing and rebounding in the last 4 to -- 2 to 4 quarter. But now, looking ahead, and looking at the activity, we see a lot of leading indicator. First, FID, if you look at the actual FID of this year, or if you look at a projection of some of the showing that it will be in excess of $100 billion offshore FID, most likely sanctioned by the end of this year, and that we almost double next year. And out of this, 50% of that will be Deepwater. They -- the acceleration of FID back to the 2019 level that is on the horizon. And that is a result of IUcs going to exploit that basin and focusing on the . The national oil Company exploiting and looking the oil and gas reserve to participate to the supply. And finally, there has been a lot of asset changing -- trading hands In the last -- in the last few quarter on this independent, also pursuing accelerated FID in different basing where they expose. And the result of that is backlog is growing. We are definitely above 1 book-to-bill ratio. And we will certainly be going year-on-year in excess of 30% or 40% our booking from 2021 -- 2020 to 2021. So we are indeed quite positive and constructive, and displays very well to our portfolio, because this is where we're construction whatever performance in exploration appraisal offshore compact are getting to benefit and it was very visible during the third quarter. So you could take these as a proxy of the future.
J. David Anderson : Thank you, Olivier.
Olivier Le Peuch: You're welcome.
Operator: And our next question is from Chase Mulvehill with Bank of America. Please go ahead.
Chase Mulvehill : Hey, good morning, everybody.
Olivier Le Peuch: Good morning, Chase.
Chase Mulvehill : Good morning. I guess first thing out, a macro higher level question about this investment cycle. There seems to be this growing narrative out there that the oil and gas industry is going to continue to under-invest this cycle given the discipline narrative of the E&P industry. and also this energy transition focus. And, obviously, you talk to more EMP in oil and gas producers than probably anybody worldwide. And so given the commentary that you expect exceptional growth in a multiyear cycle in the oil and gas industry, this obviously leads you to believe that there's not going to be this under-investment going forward. Maybe if you can provide some color around this and thoughts around the disconnect between some investor perception that you're not going to see a reinvestment cycle going forward.
Olivier Le Peuch: I've been to offsets, it's a new combination as we are living with. We're living with -- from the results of under-investment in the last 5 to 7 years combined with a reset that we have experienced in industry during 2020, and also, uninhibited capital discipline partly North America. When you combine this and look at the month outlook that we surpass to the GDP growth expected for the next 2 or 3 years, that we surpassed the 2019 level sometime next year. I think the result of which will care to pull international supply and will create necessity for reinvestment in our industry. So the question very simple. There's an anticipated deficit of supply if there is no reinvestment into our industry, we have seen that many NOCs have signal that they are set to reinvest into their capacity going forward. The IUCs are on their advantage basins. They will not be the one leading the growth in this cycle, but they would be the one pursuing still the advantage basin to generate the cash they need to transition to new energy. The independents taking benefit of this position, we did some prolific assets and in developing those assets with full support and the support of the entire industry to participate to the supply. I think the condition offset undoubtedly that this demand will have to be met with supply and the supply cannot come with inventory, cannot come if only leveraging the opaque spare capacity. More will have to be built and similar create activity growth in the coming years. And it's a -- and it's not only your short in 2022. this talked about, this capacity expansion in Middle East long-term project that will have long term effect beyond the '22 '23 .
Chase Mulvehill : Okay. Alright. That's perfect. Just one quick follow-up. Just some clarification on your guidance of fourth quarter, I think you said flat margins. Was that flat consolidated margins or was that flat for each segment? In other words, if you run the mix could actually margins -- because favorable mix could margins be up.
Olivier Le Peuch: Chase, we don't disclose and we don't guide on down to the Canada division. I think we're talking about the flattish margin, global margin, and in a sense maintaining the high-margin and exiting in the mid-teens globally for the Company as opposed to margins and the same level of EBITDA margin. That's the -- what matters for us is the hit rate and the implication of this exit rate as we enter 2022 as a platform, as a foundation for margin expansion going forward. The mix is giving us these results of a flat though about mid-teens margin, and that's what your ambition, and we are very proud of this -- maintaining this level of margin.
Chase Mulvehill : Okay, perfect. I'll turn it back over. Thanks Olivier.
Olivier Le Peuch: Thank you.
Operator: Our next question is from Arun Jayaram with JPMorgan Chase. Please go ahead.
Arun Jayaram: Yes. My first question is, Olivier, there's 3 to 4 million barrels of productive capacity offline from OPEC. And as the cartel methodically brings back this output called in for a increments. I wanted to get your thoughts, is this just creating any near-term service opportunities for you and I was wondering if you could maybe elaborate on any shifts globally in spending from maintenance Capex type spending, to growth and productive capacity, oil and gas and what this means for Schlumberger.
Olivier Le Peuch: Think at the OPEC Plus we continue to release this income out of oil to the market to be behind the I and the supply curve, the end of the month curve, but we are continuing to see an increase of intervention activity -- short-cycle activity that is starting to materialize in the OPEC Plus countries where we are seeing mobilization of dimension stimulation as you have seen lifting and pushing maintenance activities. So that's the effect on short-cycle. This will also include rig head mobilization to do some drilling to your staff to support these of for their country that have the capacity to expand fast and this return to more long-cycle, as both the gas development is accelerating. And you have seen the instruments from Saudi and the contribution of the large gas in the Middle East and elsewhere, as well as the commitment that two or three countries have taken around the expansion of production capacity, permanent capacity towards the rise on of 24, 27, depending on the country. what you talked about has an impact on short-cycle, but this is an underlying activity growth coming from long-cycle as well.
Operator: And our next question is from -- Arun (ph), do you have any follow-up? We'll move on. And we'll go to line of Connor Lynagh with Morgan Stanley. Please go ahead.
Connor Lynagh : Yeah, thanks. Just on the first point here. I just wanted to return to Chase's (ph) question and just think through some of the dynamics in the fourth-quarter here. So I would think with digital being narrowly called out as particularly strong in the fourth quarter, as well as some activity growth you're expecting. It would seem, assuming that supply chain issues aren't getting worse, that you would naturally have some expansion in the margin in the fourth quarter. So I'm just curious, what I'm sort of missing in that framework. What's your -- what type of issues are you or accounting for?
Olivier Le Peuch: No, it's a mix effect. I think you have to account for -- to affect first the production system that had some losing supply related delay into delivery will have a sizable catch-up in the fourth quarter. And these segments, we are very happy with the double-digit margin and for margin expansion. This will be in a mixed slightly additive to our margin overall. And that will offset some of the what you could expect from our where we expect a stronger end of year of sales. But also you have to add to the mix the fact that you are in going to seasonal effect in Northern Hemisphere and to lower our mix of exposure appraisal, that would have an effect on our seasonality all performance that is something that we -- that happens every year. And where the first quarter is typically the high-margin their quarter due to this probable offshore expression of that declined for one or two quarter before it re-bounce strongly every, every spring. So that's when you put this mix together you result into your maintaining the margin at the level we're putting which is something remarkable. And entering the 2022 on a high, high ground.
Connor Lynagh : That's helpful context, thank you. The second one is a higher-level question here. You did have some integrated projects you disclosed in the press release. As we think about this portion of your business, it certainly has been characterized by yourself in as probably those -- the later area we're going to see pricing improvement. But I guess my question is effectively why. It seemed to me that the service companies that can really execute that large-scale integrated work is a very short list and it seems like there's a lot of value to be delivered to the customer from that type of contract. What -- why isn't the scenario that we should be more excited about over the next year or two here?
Olivier Le Peuch: I think it's -- it has remained competitive due to the sheer size of this contract. But until the capacity in the market creates -- is stretched and is tightening, I think you will see that the market remain competitive on large integral contract. But the capital discipline, the activity growing in all basins is set to create the conditions for the tightening and hence, lifting on the core pricing of our offering. Now, we are still very satisfied with these awards because we demonstrated that we, through integration, through performance, through technology, including digital and ., we have been differentiated in our ability to sustain our performance on those compact, and trade the value we need to elevate the margins.
Connor Lynagh : All right. Thank you. I'll turn it back.
Olivier Le Peuch: Thank you.
Operator: And next we have a question from Scott Gruber with Citigroup. Please go ahead.
Scott Gruber : Yes. Good morning.
Olivier Le Peuch: Good morning Scott.
Scott Gruber : Morning. Morning. Olivier you're feeling better about your mid-cycle, 25% plus EBITDA margin target, which seems warranted given the backdrop here. But if I just look at consensus estimates, at least the market believes it would take you awhile to achieve, so do you kind of extend consensus assumed 10% annual growth in '24 '25 extended 30% is type incremental. The market is forecasting in '22 and '23, it would actually take about 5 years to get to 25% plus EBITDA margin. Do you think you can outpace 30% incremental over the next few years and hit that 25% margin faster than 5 years?
Olivier Le Peuch: I think first it's not a matter of if but when will and exceed the 25% EBITDA. We have been doing it. We have been delivering over 40% recently. The market condition as we foresee for -- going forward, as have come up that earlier, favorable with the right basin and operating environment mix that is favorable to our margin, margin mix. Technology adoption, performance through and digital operation, and our creative useful mix of bringing the condition before pricing kicks in to give us the outlook of putting about the constructive outlook on lease so that we would indeed ambition to achieve this before 5 years .
Scott Gruber : And -- if you think you can get there without much pricing? Does the pricing gains just always take a while to move across discrete products into the bundled contracts and then, into your average selling price. Do you think you can get the other drivers and get there faster without much pricing?
Olivier Le Peuch: Some of the -- some are performance to-date, okay? Putting and elevating the performance of our divisions to their highest level in 3 years or more and restoring through North America already proved that we can move our margins through execution, through performance, through high-grading visibly. Can we move I think pricing will only accelerate the time by which this will be met. But we are still constructive that we'll achieve this in the ability of pricing and that pricing will come as a bonus to innovate beyond 22 to 25%.
Scott Gruber : Got you. Great to hear. Thanks for the color.
Olivier Le Peuch: You're welcome.
Operator: Our next question is we're going back to the line of Arun Jayaram. Please go ahead.
Arun Jayaram: Yes. Thanks for letting me back -- thanks for letting me back-in. Oliver, year-to-date, you've reduced debt by about 1.5 billion and I wanted to get your thoughts on how you're thinking about the priorities for free cash flow generation between cash return, the dividend, and the balance sheet. And also how you're thinking about Schlumberger 's investment in Liberty now that the lockup recently expired.
Stephane Biguet : Luco (ph) or immediate priority remains the deleveraging of the balance sheet. And yes, we've progressed quite well and we are very happy with it. So now we do have a clear line of sight to achieving our 2 times net debt-to-EBITDA target leverage. And we said, we should do that by the end of 2022. The earnings expansion, we are expecting in this growth cycle and our continuous focus on capitals to achieve. Yes, we will continue to generate significant excess cash in the next few years. This will allow us to maintain a healthy balance sheet and it will give us the flexibility to increase returns to shareholders, as well as, for new growth opportunities. As it relates to returns to shareholders, this is something we will continue to review with our Board of Directors as the cycle unfolds and the leveraging of our balance sheet accelerates. And as it relates to new growth opportunities, we will -- whether it's in digital, new energy, any new investment, we will continue to look at under the strict lens of our returns base, capitals to actually framework. Your question on Liberty. Clearly we are happy with the transaction we made now more than a year-ago, we are benefiting from the recovery in North America for the significant appreciation of our equity stake there. And yes, monetization is clearly an option. The timing and the pace and the magnitude of this monetization will be based on the market conditions and the outlook, but we'll make sure we'll optimize it, basically.
Arun Jayaram: Thank you.
Operator: Next we'll go to the line of Roger Reed with Wells Fargo, please go ahead.
Roger Reed: Yes. Good morning. Thanks for --
Olivier Le Peuch: Good morning, Roger.
Roger Reed: Thanks for having me on here. I guess, I'd like to come back to the 25% margin goal for EBITDA but think of it maybe in a slightly different way. You got obviously the typical cyclical recovery, so utilization, you'll get some pricing. You talked about digital as one of the big separating factors. And I was wondering if as you look at the goal of the 25, maybe a waiting of where you think that could go if you thought what would be normal for utilization, normal for pricing, and then digital on top. Is it a third, a third, a third? Is it 50-50? I'm just curious how we should think about that coming through.
Olivier Le Peuch: I think it would be difficult to give you precise outlook because this will depend on every division. And almost on every geography depending on a mixed outlook we foresee. But to say leverage with the need being a base for margin expansion to the way we execute with efficiency using our own digital transformation to execute and extract performance from our execution. So that's the base. Above that, I will place the digital -- the technology first and technology mix adoption from basin that are highly differentiated and successfully basin. I will include the transition technology that are starting to emerge as a unique differentiator. And then we'll include also the integration delivery of performance in our negotiation contract. And then indeed, and you are correct, our expansion will be favorable on top, so I think you have these three -- two things, but I don't want to be the -- starting to be trying to create standard between these. I don't think it's appropriate and I think it will depend on every basin and every division would have different trajectory. But we are confident that across the portfolio we have considering the international mix, considering the offshore, considering the technology adoption of this coming back, I think this -- we have the .
Roger Reed: Okay, great, thanks. And then just an unrelated follow-up. I was curious. You talked about a lot of major projects and so forth. globally. We've seen obviously some pretty extreme pricing in LNG and natural gas overall. So if you just looked at natural gas as a driver on the project side or the activity side, anything globally, you could say, looks like it's improved over recent months or recent quarters or anything on the sort of larger project side, there.
Olivier Le Peuch: Gas is there therefore longer -- a long time as, as a critical supply, as a transition fuel as well. So I think you see that the existing reserve, be it on commercial or conventional offshore onshore will be commercialized by our customers. As long as they have a pass to market through an or they have a pass market to pipeline. So we see this accelerating. We are seeing some of the critical announcement we made this morning onshore, offshore and commercial -- and conventional gas development and we see it as a trend that is not about to stop. Now, we'd accelerate, I think the gas supply demand is miss-balanced this year. We'll recover a little bit next year, but we'll continue these strong project to a going forward. And the other country that are committed to accelerate their gas position in are the most visible one, that will their consumption of gas and will then participate to fuel the gas demand and will itself expand in gas supply as well domestically. The domestic gas, India as an engine of growth for gas beyond that they can mix and some specific security supply -- of supply that will trigger some gas development from existing gas, the development of short-cycle activity. I'm optimistic and very, very pleased with the gas contract we have been winning this quarter.
Roger Reed: Thank you.
Operator: Thank you. And our next question is from Waqar Syed with ATB Capital Markets. Please go ahead.
Waqar Syed: Good morning. Thanks for taking my question. Olivier, just 1 broader question. You've given us some good guidance on upstream capital spending for international markets and North American markets for next year. Now with respect to exploration budgets in particular, do you see the growth rate of exploration spending in line with otherwise global spending on higher or lower?
Olivier Le Peuch: It's too early to give a specific guidance for exploration. Why we say for explosion is that we're seeing 2 things are coming back. We are seeing some seismic activity coming back, including some proof that the seismic bolt utilization is going. But what is more critical is the near-field exploration is triggering more activity in exploration going forward as everybody wants to get better return on the existing infrastructure to cut tieback. And hence, we have seen some licensing round as well. So licensing rounds, some seismic survey coming back, and exploration -- near-field exploration for future in-field or payback is what we see. So to give you a magnitude directionally, it will improve -- it will increase, but to give in mind at least too early.
Waqar Syed: Okay. And then, with respect to the EPS business, previously, there was some plans for asset divestitures. Are those plans on hold or are you still pursuing those?
Stephane Biguet : Look for in Canada, which is what we discussed previously. We have received those firms with values, commercial constructs, and now, we're addressing the process of evaluating the potential marriage and risk associated with those proposals. This is what we're doing now. In the meantime, we are, of course, managing these assets as to optimize cash flows in the current commodity pricing environment and it generates quite a lot of cash flow.
Waqar Syed: Okay. Thank you very much. Appreciate the answers.
Olivier Le Peuch: Welcome.
Operator: And next we go to the line of Neil Mehta with Goldman Sachs. Please go ahead.
Neil Mehta: Thanks so much team. I just want to go back to everyone's question on deleveraging. As you think about the right of the optimal capital structure, is 2 times net debt to EBITDA still the normalized way you would think about the business? And based on the visibility you have on cash flow, when do you think you'll be in a position to hit that target?
Stephane Biguet : It's a good question Neil. Is 2 times the right level? You could argue, it's a good level throughout the cycle. Now, in an up-cycle, with the cash you generate, the excess cash we would probably be happy to go below 2 times and it will give us the required flexibility, as I said, to look at growth, additional growth opportunities, and potential incremental shareholder returns. We may not stop at 2 times. We can take this as an intermediary step and we -- 2 times will just be an average while the cycle I think is the right level.
Neil Mehta: And then the follow-up is just on the digital business, you spend a lot of time talking about it on this call, but do you think you'll -- the Company will ever get credit for the digital business which is highly valuable, terrific margins embedded within a more volatile services and technology business? Does the does that asset ultimately belong outside of your core business? And I look at Emerson and as per the transaction that they recently did to try to put a better marker on the value of digital. It's a high-level question, but I'm curious on what the optimal way to showcase the value of that businesses.
Olivier Le Peuch: The first, we will continue to pursue. We have many investment these two platform. We are using it both internally and externally. We have critical customer that depend upon us and we'll continue to trust us for the future. We are using it to accelerate our growth, the on our growth and our returns. And wherever you are getting the right value, I think it's up to you to review and give us the multiple expansion that we deserve for these. I think we have been so far the most ready, enough margins, sustained margin to this. We anticipate the growth to not come through to play visibly in the coming years. And I think our leadership in this is recognized. And yes, I would expect that this will be turning into a premium for valuation.
Neil Mehta: Okay. Thanks guys.
Olivier Le Peuch: Thank you.
Operator: Go ahead please
Olivier Le Peuch: I believe it's time to go. I'm not sure that we have time for another question.
Operator: At no further time you may conclude.
Olivier Le Peuch: Okay. So thank you very much. So I would like to conclude the call and I would like to leave you with few key takeaways. 1, during the first quarter, our growth momentum was sustained both internally -- internationally and to North America, and drove peer-leading margin expansion advantage market position and increased technology adoption. We also generated sizable free cash flow, allowing us to materially reducing our net debt. 2, our performance in execution have proven integration capabilities and have differentiated technology and digital portfolio, and increasingly our customers. And have resulted during the quarter across Middle East, offshore and in gas development all critical markets as the up-cycle unfolds. 3, we're confident that the momentum of these up-cycle will continue allowing us to close this year with another quarter of revenue and earnings growth resulting in full-year sequential growth internationally and North America, and full year margin expansion on the high-end of our guidance. Finally with gulp of strengthening demand in the energy markets to macro conditions are increasingly set to an exceptional growth cycle, unfolding broadly during 2022 both international and North America, and resulting in significant earnings growth potential for . Ladies and gentlemen, I could not be more satisfied with our strategic progress to-date, the enthusiasm of our entire team, and delivered the trust of our customers. I look forward to the coming quarters with increase confidence. Our returns focused strategy execution as here to the conditions for unique outperformance in our goal and this at the on set of the sub cycle while it's innovating our systemic commitment and accelerating our new energy strategic . Thank you very much.
Operator: Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T teleconference service. You may now disconnect.
