SLB - NYSE

Thank you everyone for standing by. Welcome to the Third Quarter SLB Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to James R. McDonald, Senior Vice President of Investor Relations and Industry Affairs. Please go ahead.

Thank you, Leah. Good morning, and welcome to the SLB third quarter 2024 earnings conference call. Today's call is being hosted from New York, following our 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. For more information, please refer to our latest 10-K filing and other SEC filings, which can be found on our website. Our comments today also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures can be found in our third- quarter press release, which is on our website. And finally, in conjunction with our proposed acquisition, SLB and ChampionX have filed materials with the SEC, including a registration statement with a proxy statement and prospectuses. These materials can be found on the SEC’s website or from the parties’ websites. With that, I will turn the call over to Olivier.

Thank you, James. Ladies and gentlemen, thank you for joining us this morning. During the call, I will cover a few topics. I’ll start by reviewing our third-quarter results. Then, I will discuss how we are leveraging our differentiated market positioning, digital leadership, and operating efficiency to navigate the evolving macro environment. And finally, I will provide an update on our full-year financial ambitions and our early outlook for 2025. Stephane will then provide additional details on our financial results, and we will open the line to your questions. Let’s begin. SLB delivered strong third quarter results with continued margin expansion. Sequentially, although revenue was flat, we expanded our adjusted EBITDA margin by more than 50 basis points to 25.6% by driving efficiencies throughout the business and we generated very strong free cash flow of $1.81 billion. In the international markets, revenue remained steady sequentially despite lower reactivity as commodity prices resulted in a more cautious approach to discretionary short cycle spending. Demand for SLB's digital products and services continued to accelerate and we saw continued growth in the Middle east and Asia, fueled by oil capacity expansions and strong gas activity as well as offshore projects. Meanwhile, revenue in Europe and Africa was largely unchanged as strong production and recovery activity in North Africa was offset by a decline in Latin America following a strong second quarter. Turning to North America, revenue increased 3% sequentially as higher offshore activity in the Gulf of Mexico was partially offset by lower drilling activity in U.S. land as the market remained constrained by gas prices and ongoing capital discipline by operators. Next, let me touch on the performance of the Divisions. In Digital & Integration, we delivered strong sequential growth led by our digital business, which reached a new quarterly revenue high. We also continued to increase profitability, expanding our pretax segment operating margin to 36%, driven by higher digital revenue and cost optimization. Overall, our digital business remains on pace to achieve full-year revenue growth in the high teens, and we announced a number of exciting new products and partnerships during the quarter that I will discuss a little later in today’s call. Turning to the Core divisions, Production Systems continues to grow, benefitting from long-cycle development activity, particularly in the Middle East & Asia and in the Gulf of Mexico. I was proud to see that most Production Systems business lines contributed to this performance, as we continued to secure sizable bookings, while also increasing our backlog for the future. Reservoir Performance remained steady, supported by stable production and recovery spending, and Well Construction declined slightly, due to weaker land activity in North America and in the international markets. Overall, these results demonstrate SLB’s unique ability to navigate the evolving market by leveraging our differentiated international and offshore positioning, our broad technology portfolio, and our continued focus on capital discipline and operating efficiency. I want to thank the SLB team for continuing to deliver for our customers and shareholders in this dynamic environment. I am extremely proud of their contribution and dedication to our performance strategy. Next, I wanted to share some updates on our progress in digital. We delivered another quarter of strong digital growth as operators continued to increase their investments in digital technology to reduce cycle times and risk, enhance productivity, lower costs and carbon, and accelerate returns. This is presenting opportunities for high margin growth, and we have taken a leading role in this space, partnering with our customers to accelerate their transition to the cloud, scaling new technology for drilling and production operations, and creating new markets by delivering disruptive solutions for data and AI. As part of this journey, we hosted our Digital Forum in September, where we brought more than 1,000 customers and partners to innovate solutions and shape our shared digital future. During this event, we launched the Lumi data and AI platform, which will accelerate advanced data and generative AI capabilities at scale for SLB’s customers across the energy value chain. Today, we offer approximately 150 AI and machine learning capabilities across our products and solutions, and we continue to work with our customers and partners to innovate and deploy new ones. We also unveiled a number of cross-industry announcements during the Forum. Theis includes a collaboration with NVIDIA to develop generative AI solutions for energy, as well as a partnership with Amazon Web Services to expand access to applications from the Delfi digital platform and to evaluate decarbonization solutions for Amazon’s digital infrastructure. Each of these agreements helps to expand our capability set and positions SLB as a key partner in digital and sustainability across the industry. Next, let me discuss the macro environment. Over the past few months, commodity prices have been under pressure. This is largely due to concerns of an oversupplied market, driven by higher output from non-OPEC+ producers, uncertainty around OPEC+ supply releases, weaker demand from China, and softer economic growth rates in the U.S. and Europe. This has resulted in a cautionary approach to activity and discretionary spend by many customers as highlighted in our third-quarter results. Despite these evolving market conditions, we believe the long-term fundamentals for oil and gas remain in place. Demand for energy is increasing and energy security remains a global priority, as witnessed by recent commodity price fluctuations tied to geopolitical tensions in the Middle East. In this environment, gas will continue to play an increasing role in the energy transition, while oil will remain a large part of the energy mix for decades to come. Internationally, gas investment remains strong, particularly in Asia, the Middle East, and the North Sea, and is expected to grow regardless of OPEC+ decisions on oil production. Meanwhile, while short-cycle oil investments have been more challenged, long-cycle deepwater projects globally and most capacity expansion projects in the Middle East remain economically and strategically favorable. Specific to North America, we do not see U.S. activity rebounding in the near term, and any potential increases in gas rigs could be quickly offset by a further decline in oil rigs due to increased operating efficiency. Overall, we expect this to result in a sustained level of global upstream investment in the years to come, with the secular trends of digital and industry decarbonization extending the investment horizon. SLB is well positioned to navigate in this evolving macroenvironment through our differentiated portfolio and multipronged strategic approach across Core, Digital, and New Energy. With that backdrop, let me conclude my opening remarks by sharing our outlook for the full year 2024 and our early thoughts regarding 2025. Specific to the fourth quarter, we expect muted revenue growth, with a favorable mix of year-end digital and product sales partially offset by E&P budget exhaustion in U.S. land and cautious discretionary spending from certain international customers. And, with continued cost optimization, we anticipate we will deliver EBITDA margin expansion in the fourth quarter. For the full year of 2024, ongoing margin expansion will enable us to deliver full-year adjusted EBITDA margins at or above 25%. Additionally, our strong cash flows, coupled with the announced sale of our Palliser asset in Canada, will support increased returns to our shareholders. In 2025, we see the potential for upstream spending in the international markets to grow in the low to mid-single digits, while North America spending will be flat to slightly down. This directional outlook will depend on the geopolitical environment and commodity prices, and we will share an updated view in January after we receive more feedback on customer budgets. In conclusion, SLB remains well positioned to deliver strong financial results, as our optimized cost structure, portfolio rationalization, differentiated exposure to key international and offshore markets, and digital leadership will support further margin expansion, higher cash generation, and increased returns to shareholders. I will now turn the call over to Stephane.

Thank you, Olivier, and good morning, ladies and gentlemen. Third-quarter earnings per share excluding charges and credits was $0.89. This represents an increase of $0.04 sequentially and $0.11, or 14%, when compared to the third quarter of last year. During the quarter we recorded $0.02 of merger and integration charges relating to the Aker subsea and ChampionX transactions and $0.04 of charges in connection with the program we started last quarter to realign and optimize the support and service delivery structure in certain parts of our organization. Overall, our third-quarter revenue of $9.2 billion was essentially flat sequentially. However, the third quarter represented another quarter of both sequential and year-on-year margin expansion despite revenue growth rates moderating. These improvements were driven by very strong Digital & Integration margins combined with the effect of the cost optimization program I just mentioned. Additionally, the resilient, long-cycle Production Systems business continued its top line growth and margin improvement journey, benefiting from its strong backlog. Sequentially, our pretax segment operating margin expanded 48 basis points to 20.8%. Company-wide adjusted EBITDA margin increased 55 basis points to 25.6%, representing the highest level since the first quarter of 2016. Let me now go through the third-quarter results for each Division. Third-quarter Digital & Integration revenue of $1.1 billion increased 4% sequentially with margins expanding 456 basis points to 35.5%. The sequential revenue growth was entirely due to higher digital sales, as APS revenue was flat. The strong margin performance was driven by improved digital profitability as a result of the higher uptake of new digital solutions and the optimization of our digital support and delivery structure. Reservoir Performance revenue of $1.8 billion was flat sequentially as higher intervention activity in international markets was offset by lower evaluation revenue in Latin America and the Middle East. Margins contracted 53 basis points due to the unfavorable technology mix. Well Construction revenue of $3.3 billion decreased 3% sequentially on lower rig count in U.S. land and Saudi, and the completion of drilling projects in certain offshore markets. Margins decreased 19 basis points as a result of the lower activity. Finally, Production Systems revenue of $3.1 billion increased 3% sequentially driven by higher sales of surface production systems, completions, and artificial lift, led by North America and the Middle East & Asia. Margins expanded 110 basis points to 16.7% on improved profitability in artificial lift, completions, surface and midstream production systems. With regard to our liquidity, our cash flow performance during the third quarter was very strong, as we generated $2.4 billion of cash flow from operations and free cash flow of $1.8 billion. This represents a $1 billion increase in free cash flow as compared to last quarter, largely due to significant customer collections. Capital investments, inclusive of CapEx and investments in APS projects and exploration data, were $644 million in the third quarter. For the full year, we are still expecting capital investments to be approximately $2.6 billion. On the M&A front, as announced yesterday, I am pleased to report that we have signed a definitive agreement to sell our interests in the Palliser APS project in Canada. This transaction will reduce our direct exposure to commodity prices and the associated earnings volatility as well as reduce our capital intensity. It also allows us to eliminate significant future abandonment liabilities. Under the terms of the agreement, we will receive cash proceeds of approximately $430 million U.S. dollars, subject to closing adjustments that are typical for such a transaction. This transaction will also result in us removing asset retirement obligations from our balance sheet with a present value of approximately $280 million. This transaction, which is subject to regulatory approvals and other customary closing conditions, is expected to close before the end of this year. Turning to the pending ChampionX acquisition, the integration teams on both sides have been working together closely, and we are extremely pleased with the progress they are making. We now anticipate the transaction to more likely close in the first quarter of 2025. Finally, total returns to shareholders, in the form of stock repurchases and dividends, was approximately $2.4 billion on a year-to-date basis. During the third quarter, we repurchased 11.3 million shares for a total purchase price of $501 million. As a result of our strong cash flow performance, we expect to maintain this level of buyback in the fourth quarter. Consequently, we will exceed our previous commitment to return $3 billion to our shareholders in 2024. Furthermore, we reaffirm that we will return a minimum of $4 billion to shareholders in 2025, reflecting our confidence in our ability to continue generating strong cash flows. I will now turn the conference call back to Olivier.

Thank you, Stephane. Ladies and gentlemen, we will open the floor to your questions.

Operator Instructions] And our first question is from James West with Evercore ISI. Please go ahead.

So, Olivier, obviously, more muted top line growth as we go through '25 is kind of expected here, but you guys have a lot of initiatives underway that will drive, I think, margin -- continued margin journey, margin expansion journey, I guess, is a better way to put it. Could you talk about some of the drivers there and how you see -- maybe you or Stephane, how you see that unfolding as we go through the year? I know you don't want to give too many specifics yet on the year given the budgets being quantified, but just maybe help us a little bit on how this could unfold.

Yes. Good question. Thank you, James. So yes, indeed, we have the ambition to maintain our margin expansion journey as we enter 2025 or exit rate of 2024, with the results we have delivered in Q3, the ambition we have and the statement we have made on further expansion in the fourth quarter will bode very well as we enter 2025 to start the year with a kick if I may. And now looking forward, I think the guidance at this point, market spend will indicate that they will benefit from another year of international growth outpacing North America, which again and plays in our favor from the margin mix. And obviously, the combination of our digital tech -- technology premium will continue to play favorably as we accelerate technology introduction and continue the journey and ambition, we have on the on digital to reach approximately $3 billion on the and some of a year of strong growth. And finally, I think we have initiated some cost out and operating efficiency focus for our team, entire team and this is already falling through into our results, and I expect this to take full scale in 2025.

Got it. Okay. Great. And then, now that we're a little over a month out from your digital forum that you held recently, could you maybe share some of your initial thoughts on the success of the form. It seemed to me at least that the uptake in digital. Clearly, you just mentioned $3 billion in revenue. But for next year, but digital uptake is accelerating and the quality of the digital uptake, not just going to cloud, but also using all the AI tools is accelerating as well. But I wanted to get your, now that we've gotten on the way your thoughts on that.

No, fair. I think first, I'm very pleased to report that this was most likely on many aspects, our best forum ever. And from the size, the scale of the attendance, number of partners that came to join us, the number of customers that came and display their own technology. I think we're having the opportunity -- we had the opportunity to show the digital value proposition we offer in industry across the different domains from [geoscience] subsurface to operations, show it that we have an integrated platform, open platform approach with partners, and they are extending our technology from the historical on-prem to cloud edge and now AI, including Gen AI. So, I think this resulted into not realization by many customers that we can impact all aspects of the operation, unlock value in productivity, in the geoscience space, in operation for performance, and in reducing cost and carbon going forward. So, the pickup, if any, that I have is that this market in terms of TAM will expand going forward with accelerated expansion as customers realize that there is maturity into offering. There is maturing to the partnership ecosystem that we have developed. And there is opportunity for them to capture this as they want to extract efficiency as they want to be more competitive. And I believe that our opportunity is to accelerate the adoption of the toolbox that we have invested in the last 10 years to particularly benefit from digital operation. There is one domain that I think has really blossomed in the last 18 months is digital operation in production, in drilling, autonomous operation, optimization, edge AI applications that are really game changing the way we can perform with our customers, and that's where I see the future. So longer term, going beyond the cycle, growing for the long term as a business for us.

Next question we have is from David Anderson with Barclays. Please go ahead.

So, the customers -- your customers are being more cautious though your projects are still moving ahead. It seems pretty clear the cycle is kind of plateauing here. International spending, you're saying that was low, mid-single digits next year. But if you look at the prior cycle, the second half of that was really driven by sustained deepwater development. So, my question is, do you think deepwater can once again be a driver of growth, say, beyond '25? We have something like 300 billion in FID in the last few years. You just announced a slew of Petrobras awards today, and I have Namibia and Suriname on the horizon. So, my question is, is that enough to drive growth overall spending higher? Or is it just really a function of the oil prices needs to structurally improve in order to kind of get this cycle kind of reaccelerating?

Yes, I think you have seen the realization that when commodity price is under pressure, there is some pressure on short cycle that is suppressed and that may come back and will come back as soon because it impacts increased drilling, impacts intervention activity, it impacts short cycle and commercial in some region, but it will most likely come back as soon as the community price regain traction. But the long cycle, apart from some decision on timing and project execution have been untouched. And we have had a year of strong exploration activity that has unlocked new reserve, that has appraised new future pipeline of deepwater, as you have heard and seen across Americas, across South Africa, across the East Mediterranean and across Asia, where gas is critical. And the combination of these, as you know, is representing every year. This year, I think the total offshore FID will approach $100 billion, and we expect that this rate of $100 billion the FID for offshore will remain at that level or higher for the next two or three years. So, the cumulative over '23 to '26 of offshore will exceed $500 million of offshore FID and that's a sign that this project will execute beyond '25, beyond '26 and will be a growth engine for the industry going forward.

That's great to hear. Also, it's great to hear is the sale of the Palliser Block. Glad to put that behind us and now we can kind of focus much more on the digital business, of course, and I guess one of the things that you had talked about at that forum is that digital has been accretive -- is accretive to growth in margins going forward. And clearly, it's been that way already. So. you're well on your way to hitting your $3 billion target of revenue next year. And naturally, I have to ask you what's next. I don't think you're ready to give out the new target yet, otherwise, you probably would have already done that. But I guess I'm just wondering about is where do you see that growth coming from? You just talked about extended on that production side. So maybe that's another leg of growth. But a big part of this has been coming to from the well construction. And I'm wondering, if deepwater can be also a huge driver of the digital business going forward.

It is already. I think we are already deploying our well construction automation and optimization, autonomous operations in some offshore rigs and making huge defense where the cost of rig operation matters, and this is something that will unlock the future. But I think I will split in the three categories. I think you have a platform transition, cloud transition that has happened that affects the more than 1,000, 1,500 customers we have, and it's a long transition that will continue to happen one customer at a time, cloud transition that will continue to drive our Delfi adoption across our customer space in [geoscience], and we'll continue to see this affecting and being a long cycle, a long period of growth for years to come as a driver. The second is, as you mentioned, as I mentioned, the digital operation, be it in production and drilling with the emergence of edge application, the emergence of autonomous optimization application, and this is both seen by the digital services that our core divisions offering, well construction, production system and reservoir performance with having much success with this digital offering that they are putting on the back of our Delfi, and we see it into the pickup of our production and drilling operation capability by the customers themselves. And finally, and the third leg of growth in our digital portfolio, is the emergence of new data and AI capability, as you have seen, the Lumi that we have put in place. So, we combine these three over the future horizon. This will continue to be digital. As a consequence, we continue to be a growing TAM for us and will be an engine of growth that will be accretive to the top line and will deliver accretive margin to the Company. So that's the way we see it. And I will not, at this point, set the target for the risk next, but we'll continue to see growth between '25 with this context.

Our next question is from Scott Gruber with Citigroup. Please go ahead.

I'm glad to hear that you still see some growth next year. I want to ask a question that where we try to separate operating leverage that results in growth from other margin drivers. So, if we assume that upstream spending is flattish for the next three years, is there a certain level of margin expansion that you think you could achieve through further cost optimization and further growth in digital, I assume that you would challenge the organization to continue expanding margins and a flat backdrop. Just curious what that potential rate of margin improvement could be?

Yes. First, we do see not only in Q4 and into 2025, further margin expansion on that upstream spending outlook. And as you actually mentioned, it comes from several components. It comes primarily, I would say, from the mix of activities in our various divisions. As Olivier indicated, digital is a booster to our overall company margins, technology mix, performance contract or performance in general pushes margins as well. And yes, there's an element of cost optimization, not only from the program, we started at the end of last quarter -- sorry, at the beginning of last quarter of Q3, but also from our continuous focus on cost, we will continue to adjust delivery resources based on level activities, and we will continue to look for further optimization in our structure. So, it's a mix of all these components that will continue to push our margins into 2025.

Got it. And Stephane, how would the financials be impacted by the Palliser sale? How much EBITDA comes on? How much CapEx comes out?

Yes. So, we -- on Palliser, we generate approximately $500 million of revenue per year on the asset. And this comes with pretax margins in the in the high 30s. Now you mentioned something very important. It also removes quite a bit of investment that we need to inject every year to maintain this number. So, it's the CapEx is about $150 million per year. And as I mentioned as well in my prepared remarks, something not to underestimate is removing future abandonment liabilities, which discounted are about $280 million, but undiscounted are close to $1 billion. So that's -- it's a good thing. This is going away from our balance sheet and P&L, and it will reduce both earnings volatility and capital intensity.

Next, we go to Arun Jayaram with JPMorgan. Please go ahead.

Olivier, you framed that you're seeing a little bit of cautiousness in some of the short-cycle markets, North America, international oil with some resiliency in long cycle gas and deepwater opportunities. I was wondering how -- if you could -- how would you characterize the price -- the current pricing dynamics internationally, just relative to your expectations of margin expansion from here?

I think we believe that the pricing environment is still positive, constructive, I would say. I think first, realizing that the industry is capital discipline. And the industry has no spare capacity to move and to place. And as a consequence, performance, technology and integration capabilities still give us opportunity to support our pricing, and I don't see it in the current environment changing very much.

Fair enough. I had a follow-up on New Energy. You guys press release an update on your lithium DLE pilot in the quarter in Nevada, which highlighted a very high kind of recovery rate I was wondering if you could talk about alleviated the next steps to commercialize this technology. How competitive are the extraction costs today versus existing technologies? I wondering if you could just maybe frame the growth opportunity from lithium?

Well, as you pointed out, I think first, we are very pleased to have achieved these milestones again, the milestone has been to produce lithium carbonate from our demonstration plant in Nevada using direct lithium extraction from brine and using a concentration and purification process that we have integrated with our own IP and using some external technology and putting this together and working for months to tune it to digitally optimize it and to realize this. So, our plan forward is to work with prospective partners and customers. to see how this technology can be used and to respond to big demand that exists and some plans that some of our customers and partners have announced to use DLE as a method to extract lithium and produce in large quantity in the coming years. So, we are looking forward to technology to scale it for application as a license technology or as a partner where we will develop and run going forward this technology with our customers and partners. That's the way we look into it. And again, very good first and benchmark performance for such a DLE plant and exciting prospect -- long-term prospect for us in this new space.

And our next question comes from Neil Mehta with Goldman Sachs. Please go ahead.

Yes. A couple of financial questions. Maybe as we think about 2025 over the summer, you had talked about that $10 billion EBITDA target for '25 on a 20% CAGR. Just in light of some of the macro commentary, can you just talk about some of those moving pieces as it relates to that guide? And I think you've given us a lot of moving pieces, but I'd like to just kind of tie that out.

So makes sense, Neil. So really, yes, again, margin expansion is -- we are laser focused on this. We've been increasing EBITDA margins for year-on-year for 15 consecutive quarters, and we don't intend to stop. So, this is our mission. And as I explained, it's made of several types of components. Now to your specific question on 2025 and the absolute value of EBITDA compared to our long-term '21 to '25 CAGR ambition, it is possible that indeed, with the current macro outlook again to be refined, and if we exclude for the moment just to compare apples to apples, with apple, sorry, if we exclude ChampionX, it's possible that the '21 to '25 CAGR will finish in the high teens rather than breaking that 20% bar.

That's really helpful. And then it was a super quarter for free cash flow. You guys beat our model by quite a bit, very strong collections. Can you just talk about how you're thinking about -- first of all, I'll talk about the go forward for working capital and just the free cash flow profile into next year as well, including CapEx, which has been, again, trending in a constructive way.

Yes, totally. So yes, we maintain capital discipline for sure. So, this is -- this is quite predictable, and it's a bit too soon to talk about CapEx for next year, but rest assured it's going to -- the theme of capital discipline, clearly, will be there considering the macro environment. So now specifically to our Q3 free cash flow, yes, always in the second half, we generate most of the year of free cash flow. And in Q3, this was in a way more than exacerbate here. So yes, Q3 was very strong. And as we highlighted and as you mentioned, it's really -- it was really driven by customer collections. In a way Q2 was a little bit low on collections, so there's a bit of a catch-up effect. And Q4 will essentially be dependent on will be strong. It will also be dependent on customer collection. But as you can see, we do experience volatility in those collections from a quarter to another. So, we'll continue to push. We'll definitely finish the year high note as it relates to working capital and free cash flow work will continue to release as we finish the year. And going into next year, again, a bit too soon to give you a number for free cash flow, but definitely, it will be higher than 2024, not only from us, but of course, with the addition of ChampionX. And this is why we are quite comfortable to reaffirm or $4 billion target returns to shareholders for next year because free cash flow will increase in '25.

Next, we go to Kurt Hallead with Benchmark. Please go ahead. Mr. Hallead, do you have your phone muted?

Olivier, you did highlight a more tempered outlook as you go to into 2025. So, we appreciate that. In the context of those dynamics, usually as the industry kind of goes into a more moderate growth or some markets kind of go into a little bit of a slowdown. There's some pricing pressures that maybe come along with that. Just wondering, if you're starting to see or starting to have some of those conversations with your customer base? And what -- if not, what may be different that's kind of driving the discussions with the customers to go around.

Yes. I think in all cycle at any point in the cycle, I think we will always get under competitive pressure and under pressure from our customers to lower the cost of operation or improve product value. We believe that, I think, first and foremost, as long as we continue to perform credit value and exceed expectation on the performance of our operation, will relieve that any pressure that could come from a competitive and/or from a customer aspect. Secondly, we believe that the industry is tight on capacity, capacity of equipment, capacity of critical new technology. And the industry has demonstrated lately a strong capital discipline that has restrained this risk, I would say. But as long as I think -- as long as we maintain a very high customer satisfaction through our performance, continue to our technology, continue to deliver our integrated value proposition, I think we will relieve any pressure that could arise into a moderating growth environment and defend our pricing and further improve our pricing when it has it matters, and hence protect our margins going forward. So, it's a matter of execution. It's a matter of relationship, but it's also a matter of capital discipline across the industry. And I believe the condition in this cycle is a bit different than what we have suffered in the past, and I'm looking at this constructively.

Okay. That's great. That's great. Maybe a follow-up, coming full circle to your digital forum, a great event, by the way. What -- in the concept kind of the post meetings and so on and so forth, what were one or two things that came out of those meetings or discussions with potential clients of yours for your generative AI product. What was surprising to you that you maybe didn't anticipate going in?

I think the customers were, I think, first, many of them participated themselves and 150 papers were presented by our customers, more than 10 of them presented their own application of digital to other customers. So, I think it was from a lot of learnings for customers to watch each other and to learn from each other and how do they use digital technology to unlock value. So, if take away, I think, at a high, high level, I think customer realized that we are more than just one [geoscience] application on the cloud, and we have a digital value proposition that expands across different domains and across different technology stack on-prem, cloud, edge AI and across the different dimension sensing and production. So, the full value proposition we have on digital, I think did surprise many of the customers as we continue to expand and have now a very comprehensive offering. That's the first takeaway, I think. The second is, I think the emergence of AI as x-factor for the industry to unlock more value of digital. This industry is data rich, I would say. And hence, we have deployed, as you heard, 150 engineered AI full of domain, full of physics, and full of the latest data science technique to unlock more performance into our digital application. And the latest announcement of Lumi as a platform that complements Delfi, and as a platform for putting an access in all E&P data in one framework to integrate all the applications across seamlessly. And finally, to create a framework that allow customer to use AI application on their datasets across the different domains and unlock new insights or create new performance. That's sort of Lumi data and AI is getting a lot of inbound requests as we have just announced it, and it will certainly be a factor of growth in the future as the industry recognized that there is a lot to unlock from data to liberate data and to realize value through AI including Gen AI application that we develop as you have heard with partners like NVIDIA, Mistral and others.

Next, we go to Saurabh Pant with Bank of America. Please go ahead.

I know there have been a lot of questions on digital, but I had one conceptual one, if you don't mind, Olivier. As we think about the upstream cycle maturing and growth slowing, I know digital has its own secular drivers, SLB specific drivers. So, growth in digital should be different versus upstream spending. But conceptually, Olivier, how should we think about the variance, the sensitivity to digital growth opportunity relative to what the upstream market is doing? So, if growth in upstream spending slows from 10% to, let's say, low to mid-single digit, does it do too much to digital growth outlook? Or they are materially unrelated to each other?

I think as we are very early in the curve of adoption of digital, I believe, they are largely uncorrelated at this point. And we see the TAM, total addressable market of digital in our industry, in upstream actually growing as the market may be moderating from upstream CapEx. We believe that the size of digital will actually, by contrast, grow. And our ability to not only participate fully, but also gain share in this market and unlock white space in this market, such as with Lumi data and AI, and offer edge autonomous operation, I think will create for us a long growth opportunity that will be largely decorated. Now, there are aspects of short term, I would say, discretionary decision on that can affect digital. But I think the long trend, I think, I believe is positive and long trend will continue to be a secular investment opportunity for customers that now they're realizing creates value today and hence is an opportunity to differentiate their performance for tomorrow.

Right, right. Okay. That makes a lot of sense, Olivier. And my follow up, Stephane, maybe for you. Obviously, you are accelerating cash return to shareholders. This year, you have your $4 billion -- at least $4 billion target for next year. But just conceptually, as we think about the percentage of your free cash flow that you might want to return to shareholders as the cycle matures. This year, it looks like you're going to be pretty close to 80%, which is a lot higher than your target. Conceptually, is it fair to assume Stephane that, that percentage of free cash flow continues to go up as the cycle matures?

Well, you know, it is true. We set the minimum a few years back of 50%. So, yes, we have clearly exceeded that, and I'm quite happy we were actually able to exceed that. So, I mean, it really depends on investment opportunity. I think 80% is already a very good number. It's hard to tell you if it can get to 100% in 2025. I mean, it's really. We are happy with where our balance sheet is. Deleveraging has been a focus for a few years. We have turned that focus from deleveraging to return. So, depending on investment opportunities, returns to shareholders remains the priority at the moment. So, yes, you will see that percentage clearly above our initial short guidance of 50%. That's for sure.

Yes. No, that's perfect. I was not expecting you to raise it to 80% from 50%, but essentially that all makes a lot of sense as Stephane. Thank you. I'll turn it back.

Next, we go to Roger Read with Wells Fargo. Please go ahead.

I'm going to come back to digital. It's the theme of the day. So let me ask the question slightly differently for you, Olivier, as you think about it. High growth, you've got to get customers on board. You've got to have the opportunities available internally, right in terms of people and offerings. So, as we think not just the growth rate in ‘25 to $3 billion. But beyond that, what do you see as potential bottlenecks be they internal or external, that you've really got to deal with here, the front and center items about having the right people in the right place and making the inroads to your client base.

No, Roger, thanks for the question. I think there's nothing new. I think we have been working on going and understanding what can we do to unlock both from the go-to-market and from our own internal capability the digital growth. And I think we have been more success in the last few quarters. And I think it comes down to, I think engaging for customers, better understanding what I think, offering they are looking for. And I think this -- the going for multi-cloud going from hybrid cloud environment, on-prem and cloud, I think, has been an evolution that we have taken two to three years back, and I think it's paying off and is unlocking the growth. The other realization is that some customers don't necessarily are focused on the application, but I focus on data and they are willing to sort out and unlock the data. Hence, the operation of Lumi as a platform to address the customers that are more interested into unlocking data and directly accessing AI through a data platform as opposed to having to adopt the full suite. And I think we have seen this. We have done investment into our innovation factory to help collaborate for customers to tailor some fit-for-basin application to their needs. So, we have already gone through this. Is it all of cycle resolved? No. I think, as I said, it's one customer at a time, adoption on the cloud. However, I think there's something that help us a lot and I think is accelerating is the fact that digital operation led by our core division, production system, well construction and reservoir performance are becoming new agents of digital transformation for our customers, as they are pushing and getting successful into the adoption of digital services that are being delivered real time at the edge, such as autonomous drilling operation or wellbore insights or surveillance and optimization of some of our production system equipment. And this is one well at the time. This is one transaction at the time. So, the rate of adoption here, I think, and a push we have made to coalesce, if I may, are offering in the office, in the planning to offering into operation and at least under one umbrella of platform, I think, is unlocking the pace of adoption. And hence, we see this happening today, and we believe this will continue. So that's what we are doing to unlock, if you like, and working with partners to provide more options to our customers so that they recognize the ecosystem they work with. So, these are the two or three dimensions that we have worked with in the last 18 months, two or three years, and that are starting to bear fruits and starting to transfer into growth, and we don't see it changing going forward.

I appreciate that. Yes, it sounds like incremental and then eventually, we get to cascade with this. As a follow-up to that, Stephane, you mentioned capital intensity obviously declines with the sale here in the Canada E&P ops. What's the right way for us to think about capital intensity in terms of digital investments? Does it -- does capital and CapEx investment trail the revenue growth for a period of time, exceeded? Is there a way to think about maybe crossover eventually in that where the growth continues, but the capital intensity would decline? Or does it rely so much on capital investment elsewhere, there's not an easy way to think about that?

So, it's clearly different from our core business. There's a little lag or a reasonable lag between investment CapEx in our core business and the related deployment of the tool in the field. In digital, it's a much longer cycle. So first, it's not CapEx. As you know, we expense all the investments because the investments are basically -- you can categorize them if you want, in product development, research and development, and this has been done over tempted to say the last years. So, there's always, of course, to come up with new solutions to enrich the platform. We need to continue investing every year. But we are not seeing spikes in there. We make our bit tragedies within given a lot. So, our growth in digital doesn't trigger incremental capital intensity because it's really smooth over many, many years. I would say that the heavy investments have been made in the past already now is just enriching the platform and supporting the enriched offering for the customer.

And our last question will come from Stephen Gengaro with Stifel. Please go ahead.

Two for me. The first, just sort of thinking about the short term in the fourth quarter. Can you talk a little bit about the sort of the puts and takes as we look at the fourth quarter and maybe even versus sort of normal seasonality that we get every year? And I'm just also curious on the Gulf of Mexico, if there's been any big impact from the storm activity?

Not sure we got your second question. You are concerned about -- the second part of your question.

Whether there's been much impact from the Gulf of Mexico storms.

So, I will start with this to say that we have seen muted impact on the Gulf of Mexico storm in our operation, and the Gulf of Mexico has been a driver for growth in the third quarter sequentially. As it comes to the fourth quarter and your question, I think the puts and takes, I think, yes, there is an element of seasonality, both on the positive side, which is the digital and product from production system year-end sales that will normally and will create a boost to our revenue. And there is a seasonality effect on some part of the Nova atmosphere that are starting to see either part of the sequence or budget exhaustion part in U.S. land we see an offset and I think these two, as we commented, will be partially offset and we see as a consequence muted growth going forward sequentially. But that's the puts and takes that we are seeing going forward.

Great. And then the second question was really -- I'm not sure you're willing to comment on this, but as you've mentioned earlier, you've kind of been going through the integration team on the CHX front. Has there been anything that you can talk about that has sort of increased or changed your thought process or optimism on the synergies?

Well, we are -- as we said, we have been working quite a bit on both sides with the integration teams, and what we are seeing is really giving us even more confidence than we had originally on the transaction and on the synergies. So, we are not going to change our synergy target at this time, but we clearly confirm it, and we are quite happy with what we are seeing in that integration planning process.

And I'll turn the conference back to SLB for closing comments.

Thank you, Leah. Ladies and gentlemen, as we conclude today's call, I would like to leave you with the following takeaways: First, SLB remains well positioned to navigate commodity price fluctuations, benefiting from our unique operating footprint. Moving forward, we will continue to harness our technology deployment and integration capabilities to capture high margin opportunities in the international, deepwater, and gas markets. Second, our digital business remains a key differentiator in the industry. This will continue to drive higher margin growth while opening the door to new markets. And third, with our solid financial performance and focus on operating efficiency, we look forward to delivering further margin expansion, higher cash generation, and increased returns to shareholders. Thank you for joining us this morning. With that, I will conclude our call.