TRANSCRIPT PROVIDED BY THE COMPANY:.
Ladies and gentlemen, thank you for standing by. Welcome to the Schlumberger Earnings Conference Call. (Operator Instructions) As a reminder, today's conference call is being recorded. I would now like to turn the conference over to ND Maduemezia, the Vice President of Investor Relations. Please go ahead..
Thank you, Lea. Good morning, and welcome to the Schlumberger Limited fourth quarter and full-year 2021 earnings conference call. Today's call is being hosted from Houston, following the Schlumberger Limited Board meeting held earlier this week.
Joining us on the call are 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 will be making today are forward-looking.
These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. I therefore refer you to our latest 10-K filing and our other SEC filings. Our comments today may also include non-GAAP financial measures.
Additional details and reconciliation to the most directly comparable GAAP financial measures can be found in our fourth-quarter press release, which is on our website. With that, I will turn the call over to Olivier..
the three engines of growth that support our success now and well into the future.
Above all, I am most proud of our people ‑‑ their unique ability to execute, remobilizing operations across the world through numerous pandemic constraints, adapting to logistics and supply-chain dynamics, and setting new performance benchmarks ‑‑ all of which earned the recognition of our customers.
I would like to thank the entire team for delivering a year of outperformance on every metric. They surpassed all of our targets this year and created excellent momentum as we enter 2022, for which I would like now to share our outlook. Looking ahead, we have increased confidence in our view of robust multiyear market growth.
Tight oil supply and demand growth beyond the prepandemic peak, are projected to result in a substantial step up in capital spending ‑‑ amid shrinking spare capacity, declining inventory balances, and supportive oil prices.
In addition, we expect more pervasive service pricing improvements in response to market conditions as technology adoption increases while service capacity tightens. In essence, 2022 will be a period of stronger short-cycle activity resurgence, driven by improved visibility in the demand recovery and greater confidence in the oil price environment.
And as oil demand exceeds prepandemic levels in 2023 and beyond, long-cycle development will augment capital spending growth in response to the current supply. This demand-led capital spending growth sets the foundation for a strong multiyear upcycle.
Indeed, this scenario is already being established, as the number of FIDs increases, service pricing has begun to improve, and multiyear long-cycle capacity expansion plans have started ‑‑ particularly internationally and offshore ‑‑ as seen during the last quarter.
Turning to 2022, more specifically, we expect an increase in capital spending of at least 20% in North America, impacting both the onshore and offshore markets, while internationally, capital spending is projected to increase in the low-to-mid teens, building momentum from a very strong exit in the second half of 2021.
All areas and operating environments ‑‑ short- and long-cycle, including deepwater ‑‑ are expected to post strong growth, with upside potential as Omicron disruptions dissipate as the year advances.
In this scenario, increased activity and pricing will drive simultaneous double-digit growth ‑‑ both internationally and in North America ‑‑ that will lead our overall 2022 revenue growth to reach mid-teens.
Our ambition is to, once again, expand operating and EBITDA margins on a full-year basis, exiting the year with EBITDA margins at least 200 bps higher than the fourth quarter of 2021. In this context, let me share how we see the year unfolding.
Directionally, while we are still experiencing COVID-related disruptions, we anticipate typical seasonality in the first quarter, with revenue and margin progression similar to historical sequential trends, which will be seen most prominently in Digital & Integration.
This will be followed by a strong seasonal uptick in the second quarter across all divisions with growth further strengthening through the second half of the year ‑‑ supporting our full-year, mid-teens revenue growth ambition and EBITDA margin expansion.
This growth and margin expansion trajectory gives us further confidence that we will reach or exceed our mid-cycle ambition of 25% adjusted EBITDA margin before the end of 2023, leading to adjusted EBITDA that should visibly exceed 2019 levels in dollar terms. With this, I will now turn the call over to Stephane..
Thank you, Olivier and good morning ladies and gentlemen. Fourth quarter earnings per share excluding charges and credits was $0.41. This represents an increase of $0.05 compared to the third quarter of this year and of $0.19 when compared to the same period of last year. In addition, we recorded a net credit of $0.01, bringing GAAP EPS to $0.42.
This consisted of a $0.02 gain relating to the sale of a portion of our shares in Liberty Oilfield Services, offset by a $0.01 loss relating to the early repayment of $1 billion of notes. Overall, our fourth quarter revenue of $6.2 billion increased 6% sequentially. All divisions posted sequential growth, led by Digital & Integration.
From a geographical perspective, International revenue grew 5%, while North America grew 13%. Pretax operating margins improved 31 basis points sequentially to 15.8% and have increased for six quarters in a row.
This sequential margin improvement was driven by very strong digital sales, which helped sustain overall margins, despite seasonality effects in the Northern Hemisphere. Company-wide [adjusted] EBITDA margin remained strong at 22.2%, which was essentially flat sequentially. Let me now go through the fourth quarter results for each division.
Fourth-quarter Digital & Integration revenue of $889 million increased 10% sequentially with margins growing by 268 basis points to 37.7%. These increases were driven by significantly higher digital and exploration data licensing sales, which were partly offset by the effects of a pipeline disruption in Ecuador that impacted our APS projects.
Reservoir Performance growth further accelerated in the fourth quarter with revenue increasing 8% sequentially to $1.3 billion. This growth was primarily due to higher intervention and stimulation activity in the international offshore markets.
Margins were essentially flat at 15.5% as a result of seasonality effects and technology mix, largely driven by the end of summer exploration campaigns in the Northern Hemisphere. Well Construction revenue of $2.4 billion increased 5% sequentially due to higher land and offshore drilling, both in North America and internationally.
Margins of 15.4% were essentially flat sequentially as the favorable combination of increased activity and pricing gains was offset by seasonal effects. Finally, Production Systems revenue of $1.8 billion was up 5% sequentially, largely from new offshore projects and year-end sales.
However, margins decreased 85 basis points to 9.0%, largely as a result of the impact of delayed deliveries due to global supply and logistic constraints. Now turning to our liquidity. Our cash flow generation during the fourth quarter was outstanding.
We delivered $1.9 billion of cash flow from operations and free cash flow of $1.3 billion during the quarter. This was the result of a very strong working capital performance driven by exceptional cash collections and customer advances.
Cash flows were further enhanced by the sale of a portion of our shares in Liberty, generating net proceeds of $109 million during the quarter. Following this transaction, we hold a 31% interest in Liberty. On a full-year basis, we generated $4.7 billion of cash flow from operations and $3 billion of free cash flow.
We generated more free cash in 2021 than in 2019, despite our revenue being 30% lower. This is largely attributable to our efforts of the last two years relating to the implementation of our capital stewardship program and the high grading of our portfolio. As a result of all of this, we ended the year with net debt of $11.1 billion.
This represents an improvement of $2.8 billion compared to the end of 2020. We are proud to say that net debt is now at its lowest level of the last five years. During the [quarter] (corrected by company after the call), we also continued to reduce gross debt by repaying $1 billion dollars of notes that were coming due in May of this year.
In total, our gross debt reduced by $2.7 billion in the last 12 months thereby significantly increasing our financial flexibility. Now, looking ahead to 2022.
We expect total capital investments, consisting of capex and investments in APS and exploration data, to be approximately $1.9 to $2 billion dollars, as compared to just under $1.7 billion in 2021.
This increase will allow us to fully seize the multiyear growth opportunity ahead of us, while still achieving our double-digit free cash flow margin objective. We are entering this growth cycle with a business that is much less capital-intensive as compared to previous cycles.
As a reminder, during the last growth cycle of 2009 to 2014, our total capital investment as a percentage of revenue was approximately 12%. We are, therefore, well-positioned to fully reap the benefits of this growth cycle with the potential for enhanced free cash flow margins and return on capital employed.
With this backdrop, I would like to emphasize that based on the industry fundamentals and positioning of the Company that Olivier highlighted earlier, our financial outlook for 2022 is very strong.
We have high expectations and, in 2022, we expect a “triple double” consisting of double-digit return on capital employed; double-digit return on sales; and double-digit free cash flow margin. It is worth noting that we have not experienced this combination in a single year since 2015.
Finally, I am pleased to announce that we will hold a Capital Markets Day in the second half of the year. This event will allow us the opportunity to provide you with additional details relating to Schlumberger’s strategy and financial objectives. Further information regarding this event will be forthcoming shortly.
I will now turn the conference call back to Olivier..
Thank you, Stephane. So I believe that we are ready to turn the call to you for the questions. Thank you..
(Operator Instructions) And our first question is from James West with Evercore ISI..
So Olivier, I liked your increased confidence in achieving mid-cycle margins sooner rather than later. And I wanted to dig in a bit on why that confidence has increased. Obviously, we're starting at a bit higher level, but the target is a pretty solid target.
And I'm curious what are the key drivers around that confidence increase?.
Thank you, James. Let me explain why we have increased confidence. And I think some part of the answer on this question is in the quality of the results we have delivered in 2021 as a foundation. And next, I believe that the current market conditions are clearly supporting our thesis for double-digit CAGR growth over a few years.
So with this backdrop, I think we have, we believe, three or four factors that will help us continue to guide upwards our margin expansion. Firstly, we set a foundation. The foundation we have put in place in the last 18 months, the operating leverage reset, the integration performance execution, and the portfolio high-grading are here to stay.
And this was already very visibly impacting the service-oriented divisions of Well Construction and Reservoir Performance, as you have seen throughout the year and particularly the second half of last year. And we saw we obviously have this surpassed already with the 2018 margin performance.
Secondly, I think the market mix is set to improve and resonate to our profit of strength. An increased offshore activity mix has already started to happen, and we expect this to only accelerate as the year unfolds and further into 2022.
The adoption of technology also is accelerating, as you have seen, including digital, but our fit-for-basin, our Transition Technologies and all the technologies that extract performance for our operations are making an impact today, and are getting further adoption by a customer and giving us a premium. And finally, pricing.
Where a year ago, we were talking about green shoot pricing in North America, today we are seeing and we are already recording some of pricing improvements in a broad market condition, both in North America and also internationally, when we are getting awarded new contracts as well as when we have to mobilize and deliver unique technology to our customer.
So, as the year develops, we believe that these attributes ‑‑ our foundation, operating leverage, our performance that differentiate our execution give us a premium.
Our market mix, our technology adoption, success with customers and finally pricing, giving a tailwind to this will drive and further expand our margin to the 2025 ‑‑ the 25% margin expansion. So it's not about if, but it's about when. And we have gained confidence and we have moved forward our confidence in this into the 2022..
Okay, great. That's very clear, Olivier. Maybe a second question for me. As we think about the cycle is really starting to take hold here, how should we think about the cadence of growth? You've given obviously numbers for 2022.
But if we think about it by both geography and by division, where do you see the ‑‑ I guess, the biggest growth; where could there be some lagging areas? Like, just a little bit more color on that cadence would be very helpful..
Maybe in one word, the market will be ‑‑ growth will be very broad across all geographies, across all divisions. First, as a backdrop, I think that's what we are realizing and that's quite unique. But I think you have to characterize it first geographically or very high level.
I think it's possibly a tale of two halves, with North America leading the uptick of growth. Activity growth in the first half; international further accelerating in the second half. While we did end on the H2 ‑‑ over H2 of 12%.
We expect this to be the base in the first half and accelerate further in the second half internationally, so that we are even accelerating into 2023 for international activity. Secondly, I believe that if we have to characterize what will lead and be accretive to growth.
I would say America’s land, because of activity uptick, but I will also put offshore environment and Middle East. These are the three engines of growth that will pull this year’s growth to the target ambition we have put up mid-teens.
So now, per division, I think the service-oriented divisions of Reservoir Performance and Well Construction will be accretive to this we expect, followed by ‑‑ because they are benefiting from this social environment, they're benefiting from the pricing, and they have strong both NAM and international presence.
So they’re benefiting from long-cycle exposure and technology mix favorable. In addition, Production Systems will also see growth, building on the short-cycle exposure to North America and the backlog of contracts that we have won in the last few quarters that will execute towards 2022.
Finally on Digital & Integration, it's a two-phase of a division here. We expect the digital to be accretive to our growth, while it will be visibly moderated by a flattish environment for APS production, going forward. So that gives you the mix across the divisions and across the geographies..
Our next question is from David Anderson with Barclays..
Good morning, Olivier. So you gave ‑‑ you laid out the margin expansion and kind of how you're going to see that. I have a question on the other side of that, just thinking about mobilization of large tenders.
You started up on the Jafurah contract in the Middle East, but I guess, typically what we've seen in the past is ‑‑ in these mobilization periods ‑‑ these kinds of extra costs that get weighed in. I'm just thinking about how that's looking in '22.
I mean is that something that you think you're going to have to absorb in '22 and that therefore, ‘23 is sort of another margin uplift there? Or has that improved pricing on some of these contracts, kind of countered some of those mobilizations? I think you had said something about getting better pricing for mobilization.
So if you could just comment..
Yes. I think, Dave, it's part of the mix of execution that we have. And I think we always mobilize for new projects somewhere in the world. And we are committing to international growth and margin expansion this year.
The last quarter was already having a witness of significant new project starts, yet we have marginally improved our margins last quarter, and we have seen the results of the core division. So we did it already. So I think as we accelerate deployments, yes, we are very critically assessing the cost of this start-up.
We are working for customers to minimize. We are using our digital operations to remote and optimize our deployment of resources. And we believe that what we have done in the last quarter, we'll continue to do in 2022.
So I think directionally, we are still set to improve our margin internationally in 2022, despite ‑‑ and building on this new project ‑‑ so we are very keen to start off this new project. We are very proud of the different contract awards that we won last year. And I think this is part of the mix that we're executing.
And the more we ‑‑ the more activity and the more growth ‑‑ we will respond and continue to use efficiency and leverage our operating practice to minimize impact and engage with customers to get full recognition of our investment..
Understood. Okay. On the Digital & Integration side, you grew really nicely in the topline this quarter.
I was just curious, is that related to more new sales of customers? Or is it more about the adoption pace of your current customers into the workflow? And I was just wondering, a second here, if you could just tell us how much that digital portion grew this year? I'm assuming it outgrew the 8% overall top line, but if you could provide any color on that, that would be really appreciated..
Yes. Let me give you a little bit of color into this. So first, I think if I have to characterize the uptick we've seen in digital sales at the end of the year is not a pure year-end sales effect on one or two large contracts and one or two applications and software sales. It's broad. It's very diverse.
It's touch and expand upon the platform strategy that developed different revenue streams. So it's about new DELFI-cloud customers, and you have seen we have announced our progress one more time in last quarter. It's about new revenue monetization in digital operations, including Agora, including drilling, remote operations, and automation.
It's about new data business streams where we have been securing contracts for OSDU foundation, where we are the first to commercialize enterprise data management solutions on this OSDU. And it's the follow-through on the enterprise contract that we have won in 2021 or in 2020 on DELFI adoption. So it's significant.
It relates to the progress we have made in our platform. It relates to the acceleration of digital adoption by our customer and digital ‑‑ this pursuit of digital transformation by customers. And it translates into an uptick in each and every one of the digital revenue streams we have created and the success from data to workflow and to operations.
So it's diverse, it's broad, and it's multifaceted. So it's here to continue to expand. So I'm positive on this because it's not a one-off. Obviously, there is a year-end sales effect there that we're not ‑‑ that would not repeat in the first quarter. But at the same time, something that I see expanding as a platform going forward.
And we are in the early innings of this adoption. As we mentioned a quarter ago, we have 1,700 digital customers. And we are in the early innings of deploying and pursuing this large installed base with digital transformation. So it was the first cycle of this digital expansion and digital adoption.
Actually, this would continue in 2022 and accelerate beyond..
And our next question is from Chase Mulvehill with Bank of America..
So I guess the first question is just kind of around this looming investment cycle that you and I and, hopefully, investors are starting to realize needs to happen. And you had mentioned that you expect a substantial increase in spending this cycle.
So maybe you did ‑‑ you framed it a little bit, but could you kind of add a little bit of context about how you see this cycle shaking out? What gives you confidence in it? And what it means for pricing for OFS? The competitive dynamics have obviously changed, especially in international, where it feels like you've got more discipline, less players.
And so just kind of frame the cycle and activity and where you see the most opportunity for growth. And then ultimately, what this could mean for pricing this cycle for OFS companies..
Great question. I think the fundamentals, as we see them, have not changed. And actually, some characteristics of the cycle have accelerated ‑‑ have been accentuated in recent months.
So the attribute that we put first is the outlook of economic GDP growth that considering the oil intensity and energy intensity will fill and will drive the oil demand as a key attribute beyond the previous peak, no later than at the end of this year, according to the latest projection, and is set to expand visibly beyond not only in 2023, but a few years beyond this.
So the first is the macro demand situation is set to be favorable for the next few years.
Secondly, I think the supply-demand imbalance and the supply, I would almost call it tardiness that we are facing is pointing not only to an uplift in the commodity price, but also is pointing to investment ‑‑ return to investment across the broad portfolio of our customers. So you have seen it in North America, no surprise.
North America is still and will remain structurally smaller than previous cycles due to the capital discipline, but also due to the crunch of supply, including on the services side.
Secondly, I think the international underinvestment for the last few years ‑‑ actually, the last down cycle ‑‑ combined with the dip in the last two years is creating conditions for a necessary injection of short-cycle capital and then long cycle capital investment to respond to the supply.
So we are seeing growth in North America, albeit a cut, we are seeing a rebound ‑‑ a visible rebound in short and long cycle investments internationally.
And I will insist on the long cycle because I believe that both oil capacity is being looked upon by some OPEC members to secure future supply market share, but also the international and majors are investing into their advantage offshore basins and we are seeing not only infill drilling, but we are seeing FID for offshore that are accelerating going forward.
So it's a mix of offshore rebound, solid including deepwater, international short cycle, and oil capacity in land, and finally, solid growth in North America. So these are unique conditions that are tightening the capacity and that are creating the underlying pricing improvement conditions..
Okay, perfect. I appreciate the color. A follow-up to that would be, obviously, with this constructive backdrop for Schlumberger and the OFS industry, you've got a wall of free cash flow coming to you. And so when we look at this, obviously, you did $3 billion of free cash flow last year.
And it looks like, over the next two years, that should be growing. So how should we think about returning cash ‑‑ how Schlumberger is going to return cash to shareholders? And then how does M&A fit into this capital allocation strategy? Because, obviously, you're trying to reshape the company for new energy ventures and things like that as well..
Chase, it's Stephane. Look, I like your expression on free cash flow. It was indeed quite strong last year with $3 billion. Now indeed, we visibly accelerated the deleveraging of our balance sheet ‑‑ but we are not quite there yet at the leverage ratio we committed to.
So we have a clear line of sight now to achieving the target leverage we announced earlier, even though there's still some uncertainty remaining at the start of the year.
Nevertheless, with the market fundamentals consolidating, particularly in the second half of the year and into 2023, we have even more confidence indeed now in generating significant excess cash this year and beyond.
So we will be able to maintain quite a healthy balance sheet, and it will give us the flexibility to increase returns to shareholders as well as fund new growth opportunities. So we will certainly provide a comprehensive framework for future capital allocation as part of the Capital Market Day that we announced earlier.
Returns to shareholders are obviously important, and increased dividends and buybacks will definitely be part of this equation. As it relates to M&A, sorry, I didn't answer on M&A. It's also part of what we will ‑‑ it's, of course, part of the toolbox, and you'll get more details when we give you that more comprehensive framework again..
Next, we go to the line of Arun Jayaram with JPMorgan..
With the marginal supply source now moving from U.S.
shale to OPEC, I wanted to see if you could frame what kind of changes in spending patterns that you’re seeing from the NOCs versus ‑‑ call it, maintenance work versus FIDs and things to increase productive capacity?.
I think what we have seen and we are already witnessing today, I think ‑‑ and it's visible in Middle East, but beyond is the short cycle ‑‑ the return of short-cycle activity to assure, as you said, the maintenance of production and with a small but visible increment of output supply.
What we are seeing is also a commitment and some FID in the pipeline to increase oil capacity, sustain oil capacity for ‑‑ with a few countries committing to participate fully and are laying out the foundation this year and next year into expanding the supply.
But what we should not forget about ‑‑ and is part true for Middle East ‑‑ is there's also a gas market that is being very sustained, that has seen reinvestments. And it's part of the regional dynamic and that is already seeing ‑‑ is continuing to see double-digit growth.
So I think it's a combination of gas market being sustained and having had less setback than oil in the recent time.
Short-cycle expansion and long-cycle acceleration with new FID capacity, and this is true from deepwater Brazil to the future investment in ‑‑ and the current and future investment in Middle East or FIDs that are in the pipeline in Russia. So that's, again, very broad and that combined short and long cycle.
And if you were to project, I think 2022 is a supply-led activity rebound and 2023 will be a demand-led activity growth. And the capacity expansion, the long cycle will further further contribute going forward well into 2023..
Great. And my follow-up is, your outlook on 2022 embeds 200 basis points of year-over-year margin expansions in the fourth quarter. So that would ‑‑ if I did my math right ‑‑ that would put your EBITDA margins, based on the outlook, slightly above 24%. And so I wanted you to a little bit ‑‑ go ahead..
Yes. As we exit ‑‑ it's an exit rate. We made a comparison 200 bps or higher as we exit 2022 when compared to the second half or Q4 of 2021....
Exactly. Okay, got it. It’s exit rate.
So as we think about 2023, your outlook is that you could reach or exceed a mid-cycle EBITDA margin of 25%?.
Second half..
Second half. Yes....
In the second half, we expect in the second half to reach or exceed indeed..
Great.
And I just wanted to comment on the drivers of that, would be just mix and just further pricing improvement?.
I think, again, as I commented in a previous question, I think operating leverage will continue to give us a fall-through as we continue to leverage the structure change we have done and digital operation in particular.
The mix will be ‑‑ with long cycle and offshore ‑‑ will continue to be digital part of the technology adoption across the different basins will participate in the mix further. And finally, pricing will expand. So I think this is the combination that gives us more confidence that we reached this midcycle prior to previous anticipation..
Our next question is from Scott Gruber with Citigroup..
So, clearly, your capital intensity is going to be down versus last cycle. But just given potential growth rates that we're seeing coupled with you and peers keeping a lid on CapEx, it appears that the market could be quite tight exiting this year.
So, my question is, can you keep CapEx at a similar level to 2022 as a percent of sales into '23 and into '24, while still riding the multiyear growth cycle that we all hope unfolds?.
So look, Scott, indeed, our capital intensity has reduced quite a bit and quickly just because we high-graded our portfolio, we extracted more operational efficiencies and we had our capital stewardship program as well. But where we deploy assets only to the best-return countries and contracts.
So now, for 2022, we are looking at spending total capital investment, including APS, between $1.9 and $2 billion. That's just a relatively small increase compared to 2021. As to the ‑‑ can we keep this into the future? It's a bit too soon to say. But we definitely, whatever increment we make, it's geared towards technology.
It will be on the most accretive contracts. We want that incremental technology investment to be priced appropriately. And for that matter, we already have a strong pipeline of contracts that allowed us to do that at favorable commercial conditions. So we'll see how the year progresses.
But for the moment, we are quite confident that the envelope we gave you allows us to fully seize the growth in 2022 and prepare for 2023. We will see how we set the envelope in 2023. It cannot be a huge increase for sure..
But we'll keep the capital intensity of our business going forward in check. I think the capital stewardship part of our returns-focused strategy is clearly giving us a little bit of a new dynamic and a new mindset in our commercial and contractual engagement with customers.
And we have the whole organization focused on effectively and efficiently using the CapEx ‑‑ the equipment pool that we have to deploy to the most accretive contracts and the most accretive engagements we have. So we'll continue to use this discipline to make sure that we keep in check broadly the capital intensity in this cycle..
Got it.
And then, of the $1.9 billion to $2 billion budget this year, are you able to state how much is APS? And if you do end up selling the Canadian project this year, how much could the APS portion step down on an annualized basis?.
So, look, we don't disclose the split of the guidance. There is a small increase in APS investment, but it's matched with increased cash flow. As you know, the way we look at APS investment is really based on the cash flow of the individual projects. And as an aside, we are generating very good cash flow within our APS projects.
So overall, as Olivier mentioned, the business of APS, because it's just a handful of projects, is going to be pretty flat this year. And the investment level is definitely not going to increase in future years..
Our next question is from Connor Lynagh with Morgan Stanley..
Yes. Thanks. I was wondering if we could go back to pricing for a minute here. And I'm curious if you could maybe characterize, it certainly sounds like pricing has become more broad-based, but are there specific areas globally or specific divisions in which you're realizing more pricing.
And I guess the question is, when do we see this in the results? I mean, is this broad-based, and you're going to be seeing it in 2022, or is this sort of early signs and it's more of a 2023 dynamic?.
our Reservoir Performance and Well Construction particularly. The second one is linked to, I think, capacity ‑‑ and I think capacity on unique technology, capacity on equipment that is tight, be it for offshore deployments or be it for high-volume intensity basins like North America.
So this we have seen when the conditions are set, and we are getting an opportunity to expand from in green shoots to broad pricing improvement conditions.
So this we have seen happening for the last year in North America, and we see this starting to happen in offshore deployment where unique equipment have to be mobilized, have to be secured, and they are done at pricing conditions that have improved over the last few months. Finally, inflation. Inflation is something that exists.
It's related to market conditions. Inflation is something that we always deal with. And today, we are seeing more into the OECD and North America, but we are dealing with inflation every day in every geounit, as we call it, over the years, and we know how to manage it to engage with customers.
It's more acute and it's more pronounced [in some parts of some basins], and we're responding to it with engagement of our customers and using the contract terms we have to offset the inflation pressures we are getting. So it's all about performance, including our technology.
It's all about capacity tightening and it's about responding to the inflation pressure. So these three things are the lever we are using and that are starting to be more broad each of them across the different basins. Hence, it's progressive, and it's touching and addressing different basins and all divisions throughout 2022 and further into '23..
That's all helpful context. The inflation topic, obviously, is one we haven't really talked about extensively. It hasn't seemed to prevent you guys from expanding margins significantly. But, as we look into 2022, I'd say the market expectation seems to be that commodity deflation could occur, but labor inflation could increase.
I'm curious what you're seeing on that front? And should we think about either of those having a meaningful impact on your margins, either positively or negatively?.
I think first, as you mentioned, inflation is nothing new and had happened last year. And I think the performance of our supply organization, the way we are dealing with it, I think, has helped us to mitigate and shift to the right, if I may, some of these.
And secondly, I think we have been able to engage commercially to offset and create net pricing condition. So I think we see this happening forward. And when it comes to resource versus equipment, I think resource is always a hot topic in our organization.
But I think we'll respond to this by further improving and accelerating our digital operation adoption so that we offset some of the pressure on our resources as much as we can and can offset this pressure as well. So I think it's part of a toolbox that we use and that we'll continue to tune as the cycle unfolds..
Our next question is from Roger Read with Wells Fargo..
Certainly good to see things turning around here. I just had a couple of questions to follow up on some of the discussions about expectations on EBITDA, margins, the mix that you expect to see.
And I was curious what you would anticipate or what is embedded in the forecast in terms of a recovery in E&A spending within the overall spending increase, and if that's going to be less. And the reason I say that as we know several companies have essentially eliminated their E&A departments.
How that might affect the EBITDA expansion that you anticipate '22 and on into '23?.
I think it's a valid question. But I think if you were to notice some of the highlights that we have released in the fourth quarter, we had a rebound of E&A data exploration sales as part of the ‑‑ so the E&A is albeit very compressed compared to the peak of the last cycle. I think it's seeing a resurgence for two reasons.
First, customers are trying to assess and reassess their reserves near around their hubs, be it on the land that they own, or be it on the key offshore hubs that they have developed to make sure they can fast track infill drilling and develop near-field exploration.
So we see a lot of infrastructure-led exploration, not necessarily large greenfield, new, and we don't expect this to be the trend going forward.
But we see that exploration is much more surgical exploration, if I may use that word, to be near-field backyard exploration, as we call it, around near infrastructure so that the operator particularly offshore gets to accelerate the return on the existing infrastructure and get fast track, fast short-cycle return on existing offshore.
So we see that in Latin America, we see that in Gulf of Mexico and Europe, in West Africa, this is very broad. So we are benefiting from it, in our Reservoir Performance, we're benefiting from it in some of the key technology that we provide, including in digital.
So I think, while it has been a step down compared to previous cycles, there is a keen interest and investment resurgence in E&A for this reason. And I think we'll see that as a backup of FID and it's true particularly offshore..
I appreciate that. And then just looking at the Digital & Integration segment, it's obviously one a lot of us are focused on, and I know you've got a lot of expectations embedded in it as well.
I was just curious, if you look back over the last 12 months and forward over the next 12, kind of what's been a positive surprise? What's been maybe a little bit of a headwind there? And if there's been a headwind, maybe how you would anticipate that reversing as we look into '22 and '23, probably more from the customer side, but if there's anything internal as well?.
No, internal, I think we are very pleased with the progress of the deploying and continuing to build the digital foundation and digital platform foundation that support our strategy. Now, every customer has their own pace of adoption, their own intel in digital infrastructure they choose to deploy in which we need to plug.
So our choice two years ago to go with an open data ecosystem foundation, the choice we have made to go in partnership with different cloud providers, different industry partners to expand our market reach has unlocked some of these customers to come and join us in our digital journey with our platform. So we continue to work on it.
The last two years could have been a better and larger adoption, possibly. But I think we have the foundation in place. We are in the early innings, as I said, of full adoption, considering the size, the oversized scale of our customer base. So I remain confident that this is just the first step, and this will only accelerate.
So we have the right foundation ‑‑ digital is here to stay. Digital transformation is here to accelerate across the industry. And I think we are taking it one customer at a time, and this is what is happening. So we are positive..
Our next question is from Neil Mehta with Goldman Sachs..
The first question is a modeling specific one. Working capital, obviously, a big positive item this quarter. Can you talk about ‑‑ do you see it unwinding over the course of the year? And any thoughts on trajectory there? And as it relates to that, Liberty, it looks like you sold $109 million of shares in the quarter.
As it relates to that, should we think of that as a ratable exit? And is this run rate in the open market, or are you going to be opportunistic around share price?.
about 31% after the transaction. So we'll continue to monitor the value of the investment going forward, and we'll decide on further monetization based on market conditions..
The follow-up is you announced a Capital Markets Day on this call earlier in the call sometime in the second half.
Can you just talk about what you want to achieve out of that day from a financial perspective? What type of framework?.
I think we are willing to reengage with all of you in the live session, first and foremost.
We want to lay out clearly our strategic framework going forward in the cycle and beyond, including our three engines of growth, core, digital and new energy, and we will support it by laying out our financial framework for return ‑‑ including capital allocation and return to shareholders. That's what we aim at doing at that time.
And we'll be clearly expressing in that setting the long-term target that we set.
I believe we have time for one last question, operator?.
That last question is from Keith MacKey with RBC Capital Markets..
Yes, I just wanted to maybe break ‑‑ ask you to dig into your North American outlook for the 20% increase in spending this year.
Can you maybe just sort of break that out in terms of what you might expect for drilling versus completion versus price inflation in general?.
Yes. Good question. I think, first, I think the North America outlook we are providing is inclusive of offshore and onshore, and onshore inclusive of U.S. and Canada. So I think it's a mix that is a bit not difficult, but it's a lot of variables at play to decipher here. But to your specific question, we foresee indeed that the U.S.
land, which is a big portion of this activity outlook, will be having a bias towards Well Construction as the market is rotating from depleting the DUCs to replenishing the DUCs. Hence, Well Construction rig-based activity will be the lead in a 20% plus.
And I think we are set to respond to this with a Well Construction portfolio in that environment, and this will be very favorable to us. And the offshore environment is broad. And I think offshore environment will be execution of Well Construction and also Reservoir Performance.
And so, when you put all these and you put a more modest and more moderate Canada environment, you have a mix that is favorable to our Well Construction and production system in U.S. lands and favorable to our Reservoir Performance and Well Construction in offshore environments, all of which combine to give us this ambition about 20%..
Perfect. And maybe one quick follow-up. Just on the Canadian APS, I know there was a sales process outstanding. Just curious if you can give any update on your thinking there currently..
So we have received several offers for APS asset in Canada as part of the process we launched last year. So while we were assessing those proposals, the market conditions actually continued to improve and the value of the asset increased as a result.
So we actually took the decision that the offers we had received were no longer reflective of the economic value and the cash flow potential of the asset. So we are not entertaining those offers at the moment. The asset is now generating very strong cash flows, but we remain open to all options..
So I believe we need to close the call. So before we close the call, I would like to leave you with a few takeaways.
Firstly, the quality of our results during the fourth quarter, particularly the cash flow generation and our digital sales, have helped us close a remarkable year with financial outperformance during 2021, supporting significant EBITDA margin expansion and very sizeable reduction of our net debt.
Credit to the entire Schlumberger team for outstanding execution across all basins and divisions.
Secondly, our performance strategy execution has resulted in significant progress in the adoption of our digital platform, the deployment of our fit-for-basin and Transition Technologies, and the successful acceleration of our new energy ventures, each developing towards a sizeable addressable market.
Thirdly, during 2021, we had enhanced our market positions with key customers, ahead of the significant upcycle, and we will fully benefit from the scale and breadth of the favorable activity mix unfolding across all basins during ‘22 and beyond.
This will result in significant growth and further margin expansion and will support our double-digit free cash flow ambition. Finally, the macro environment is increasingly supportive of a potential supercycle.
As these favorable market conditions extend both onshore and offshore, well beyond 2022, we have increased confidence in reaching our midcycle EBITDA margin ambition of 25% in the second half of 2023.
Ladies and gentlemen, 2021 was a defining and transformative year for Schlumberger, and 2022 presents a unique environment to substantially build upon our success and accelerate our growth into the future. Thank you very much..
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..