Ladies and gentlemen, good morning. It is with great pleasure that I return to this conference, albeit virtually. I would like to thank Dave and Barclays for the opportunity to present today.
This morning, I will reflect upon the future state of our industry and address our strategy and ambition for this evolving landscape. I will share an update on our capital stewardship, our basin innovation approach, and our progress in establishing the industry-leading digital platform.
But first, let’s get the formalities out of the way. This presentation may include forward looking statements which are subject to risks and uncertainties that could cause our results to materially differ from those projected in these statements. I therefore refer you to our latest 10-K and other SEC filings.
Our industry faces unique challenges as it navigates the bottom of this cycle. However, we must look beyond this crisis with a different perspective for the future.
Today, I will demonstrate why Schlumberger stands to benefit the most from this new chapter, and how we will contribute to the transformation of a more resilient, sustainable, and investable industry.
In the new normal, we must recognize that some fundamentals of our industry have shifted.
The pledge of capital discipline and the commitment to return on capital have become the norm across the industry and are here to stay. Portfolio rationalization to deliver more economic barrels will drive the industry towards core capabilities and consolidation. This trend will favor companies with the scale and technology to enhance performance of assets across the value chain, and consequently, improve return on invested capital.
The quest for performance and efficiency will intensify. Industry resilience will be driven by a step change in operational efficiency and asset performance. In every basin, operators will seek to improve the economics of development and production. To deliver the required operational change, we must prioritize performance and efficiency by delivering fit-for-basin technology. This will not occur without increased collaboration between operators and technology providers—to create the alignment and incentives for such innovation.
In this context, digital transformation is imperative and represents our industry’s greatest opportunity for value creation during this decade. The pandemic has created a catalyst to accelerate adoption of digital applications and cloud technology. However, our digital future depends upon our ability to deploy data analytics and workflows applications at scale across offices and operations, independent of geographical boundaries. The winners will leverage a trusted digital platform with deep domain knowledge to create a step change in resource efficiency and asset performance.
Finally, decarbonization is not only an opportunity but a necessity. The industry will continue to shift investments to support the transition to gas as a lower-carbon fuel. However, we will also need to increase the adoption of technology to decarbonize upstream and midstream operations and accelerate participation in new energy ventures beyond fossil fuels.
Despite these significant structural shifts, I firmly believe the industry will innovate its way out of this crisis, building resilience by enforcing capital discipline and resource efficiency while driving performance through technology.
A year ago, at this conference, I had the privilege to lay out the key elements of our vision and returns-focused strategy, centered around customer performance. We have taken the opportunity, following recent events, to accelerate the execution of our strategy to shape a better future for our industry.
Our strategy was designed for resilience through cycles. The key directions we identified—across core, go-to-market, and new horizons of growth—have been tested by the recent events and proven very relevant.
I would like to take the opportunity to update you on the strategy elements. This includes the recently published Sustainability & New Energy strategic direction. Reinforcing this theme, last week, we added to our New Energy portfolio by entering into a partnership with Thermal Energy Partners, to form a geothermal power project development company, with its first green energy project on the Caribbean island of Nevis.
Our strategy framework also includes three additional elements that I do not plan to fully develop today:
Integrity & Efficiency; our internal performance platform as a foundation for excellence in execution; Customer collaboration and centricity as a critical attribute of the industry future; and finally, Production & Recovery as the long-term investment priority for the industry to improve asset economics by optimizing production systems, reducing lifting costs, and enhancing reservoir recovery.
Our operating model and delivery platform are key to the strategy execution. Our new organizational structure is aligned with the key directions and the elements within them. The Basin organization improves agility and responsiveness and is the catalyst to operationalize the strategy. The Division structure simplifies technology integration around key customer workflows. For example, the Production Systems Division combines our unique technology and domain expertise to deliver equipment, services, and solutions, integrating production systems from upstream to midstream.
Before I update you on our financial ambitions and strategy implementation, let me provide you with our perspective on how the market outlook and our strategy uniquely position Schlumberger in this evolving macro environment.
The realities of the crisis have reinforced and accelerated a material shift in our industry: the emergence of a compelling regional demand and supply structure.
Despite this year’s events, we remain confident in the fundamentals and long-range industry outlook.
As the world economy gradually recovers from the pandemic crisis and adjusts to the new normal, we anticipate the rebalancing of supply and demand will result in a strong activity rebound and growth for both oil and gas throughout the decade.
The oil supply outlook indicates growth, albeit at a structurally lower rate. This will be challenged by the production replacement gap from decline rates and underinvestment, and as such, will support sustained activity growth.
At the same time, gas volumes will continue to grow—led by increasing regional demand—and will gain market share as an abundant lower-carbon transition fuel, also contributing to increased future activity.
Each basin will compete to meet future demand. However, each will face unique economic challenges, and will require a step-change in performance and efficiency.
The international basins are set to gain share as demand recovers, benefiting from better economics, and capitalizing on a lower structural growth in North America. The international basins are the drivers of long-term growth in activity.
This clearly plays to our strengths, as we foresee a unique opportunity for the international basins to improve their performance and to enable our customers to supply the market with short and long-cycle barrels at better economics. We have a formidable international footprint, combined with a unique ability to deploy integration, basin-specific technology, and digital at scale in every basin to impact performance.
At the same time, we have accelerated the scale-to-fit and asset-lite approach in North America to improve returns in what we anticipate will be a structurally smaller market, yet a growth platform for the future.
With this outlook on recovery, let me now comment on our financial targets.
When we launched our new strategy, I set financial ambitions clearly focused on returns, which have guided every decision we have made since. The events of this year have not changed our view but accelerated the need to reinvent ourselves with a singular goal: achieving return on invested capital above our cost of capital.
The strategy has proven resilient, and we will achieve our ambition through the combination of capital stewardship, margin expansion, and free cash flow generation.
We have improved investment discipline, and we continue to high grade and rationalize our portfolio, with a focus on lower volatility and lower capital intensity businesses. We recently signed two agreements demonstrating this: one relates to our OneStim® pressure pumping business—which I will go through in a few minutes; the other relates to an agreement to divest our low-flow artificial lift business in North America in a cash transaction. Both transactions are subject to customary closing conditions, including regulatory approvals.
At the same time, we are making Schlumberger much leaner and are significantly improving the operating leverage as we prepare for the inevitable recovery. We have reset our earnings power through a major reorganization. This alone provides a significant margin boost, even on today’s reduced activity and revenue base.
Our international franchise is by far the largest and most diverse in the industry. Once the pending transactions close, international revenue will represent more than 80% of the whole, up from about 65% in the last few years. In addition, our international business continues to generate resilient and accretive margins and most of our free cash flow. The combination of scale and earnings power puts us in the best position to leverage the upcoming international activity increase.
In the shorter term, and absent another demand shock, we are confident that we will restore total company EBITDA margins to 2019 levels before we exit 2021, building from the combined impact of the structural reset, the North America strategy execution, and the accretive international mix. This represents a critical step towards our reaffirmed ambition for visible margin expansion both internationally and in North America.
We are also maintaining our target to generate double-digit free cash flow margins through the cycle. The strength of our operating cash flow performance, combined with reduced capital spend and lower dividend obligation, positions us to reduce debt and preserve a strong investment grade credit rating, while providing attractive returns to shareholders.
Now, moving on to the three strategic elements that I will cover in more detail.
Operational efficiency is a key foundation of our performance strategy and necessary to achieve our financial ambitions. We must be the best operational performer, the most disciplined allocator of capital, and the most responsive with digital technology. We have taken major steps to lead in each of these areas.
As highlighted earlier, the impact of the reorganization and other actions we have taken will permanently remove over $1.5 billion of structural costs on an annual basis. This supports our ambition to expand earnings, both in margins and dollar terms, sequentially this quarter on a flat revenue outlook.
We promptly adjusted capital spend, with a 45%, or $1.2 billion, target reduction in 2020 total capital expenditures, when compared to 2019. With improved investment discipline and resource allocation, we believe we can maintain capex as a percentage of revenue between 5% and 7%—excluding APS investments, which are managed separately, based on individual project cash flows.
Finally, we continue to digitalize our operations, reducing both the capex and the operating costs required to deliver our products and services. Today, we routinely reduce our operational headcount by 25% when operating remotely, and we soon expect to reach 50% on certain wellsite operations. Simultaneously, we are using data science and automation to optimize equipment and operating procedures, resulting in savings approaching 30% on equipment operating expense.
As we realize these efficiencies, digitalization of our operations will drive visible margin expansion when activity rebounds.
The best illustration of adherence to capital stewardship and basin-specific strategies is the transaction we announced last week regarding our North America hydraulic fracturing business. We will combine the OneStim product line—including its pressure pumping, pumpdown perforating, and Permian frac sand businesses—with Liberty Oilfield Services, to create the premier pureplay frac company in North America onshore.
We will receive a 37% equity interest in the combined Liberty in exchange for the contribution of the OneStim business, allowing us to benefit from the continued success of the expanded Liberty. We will continue to provide our North American customers a broad portfolio of Schlumberger services and products through our four Divisions, augmented by access to this new partnership.
I will let Chris Wright, the Chairman and CEO of Liberty, explain this transaction in more detail during his presentation. I cannot emphasize enough how excited we are to partner with Liberty, who similar to us, shares a focus on people, technology, and customer performance.
This combination will create a formidable player in hydraulic fracturing, with both the scale and technology suited for the North American market. It is the ideal model for consolidation and a winning proposition for our customers and for our respective companies, allowing each to excel in what they do best.
The timing of this transaction is advantageous as we prepare for a gradual recovery of activity and will benefit from the upside through our equity stake in Liberty. This transaction is expected to be accretive to Schlumberger in 2021 and will substantially contribute to achieving our double-digit margins ambition in North America.
We expect this transaction and the divestiture of our low-flow business to close in the fourth quarter of this year. When these are completed, we will have made extensive progress in revamping our North America land portfolio, despite a very challenging macro environment.
With this major milestone unveiled, let's now get back to the update of our other strategic elements.
Last year, I presented a fit-for-basin approach as part of our performance strategy to address the changing industry landscape, including an important shift towards regionalization.
We continue to accelerate our investment and are currently developing 75 basin-specific technologies which elevate customers’ performance and competitiveness. I want to share three examples. Each of these basin-specific examples is aligned with long-term regional needs.
In Q4 of 2019, we commercialized the industry’s first at-bit steerable system: NeoSteer*. Developed initially for the Northeastern US, this system delivers a one-trip curve and lateral for high-volume unconventional land applications. In less than a year, NeoSteer has drilled over 4 million feet in 500 runs, exhibiting 36% activity growth in the first half of this year.
Our recently inaugurated facility in King Salman Energy Park in the Kingdom of Saudi Arabia is now delivering completions products adapted for the local market and will soon supply Schlumberger valves as well, creating in-country value, local supply, and positioning us as regional leaders in production systems equipment.
Finally, the wireline technology-access collaboration we established in China enables us to participate in a new market. We will significantly improve the logging capabilities of our partner, China Petroleum Logging Company, with our Thrubit* through-the-bit logging services, and leverage of local manufacturing and support.
Our Basin organization is the conduit to deliver performance innovation. It enables Schlumberger to deploy fit-for-basin services and equipment, uniquely collaborate with partners to leverage access to our technology, and tailor regional operating and go-to-market models.
Now turning to digital.
We firmly believe in the power of a digital platform to create and capture the most value as our customers implement digital transformation at scale. I would like to take this opportunity to update you on our digital journey and share with you our platform adoption progress.
In the last five years, we designed and built a platform around differentiated digital technologies, enabled by key partnerships, creating a scalable, highly secure and flexible digital industry platform.
Our platform is built on broad and complementary partnerships. We have worked closely with Google Cloud and Microsoft to provide an open, digital platform that takes advantage of on-demand, high-performance computing and makes capabilities like embedded AI or machine learning readily accessible to customers.
One year ago, we made a bold decision, by contributing the data ecosystem upon which our DELFI* environment was built, to the Open Subsurface Data Universe Forum, or OSDU. With 159 members, including oil and gas operators, cloud providers, and IT integrators, this unique collaboration creates powerful data standardization for the industry, and facilitates future deployment and adoption.
Our DELFI cognitive E&P environment, now in its third year of commercial deployment, continues to gain our customers’ trust, with more than 125 contracts to date and 400% user growth since 2019.
As we continue to seek ways to solve customer challenges to digital adoption, today we are extending the global reach of our digital platform, providing the most flexible digital infrastructure deployment options.
As announced earlier this morning, we have reached a unique agreement with IBM, powered by Red Hat OpenShift, empowering our customers to leverage hybrid digital infrastructure and to overcome data residency constraints. With enabled access to an extended range of cloud platforms, including in-country cloud solutions and hybrid cloud infrastructures, we can now deploy for every customer in every basin.
We will leverage this open technology architecture to make DELFI the first-ever private and public cloud-portable digital environment for all domains across the E&P life cycle. We will also work with IBM to make this available for the OSDU data ecosystem foundations.
This represents a major step in our digital leadership journey and will significantly expand the total addressable digital market.
Building on our digital platform, we will create value for Schlumberger through two distinct avenues.
First, digitalizing our own operations allows us to capture more value from our equipment and services businesses by generating pull though when we connect them to the platform or create a step change in efficiency when they are enabled by DELFI.
Let me share a couple of examples of what I mean by pull through:
In reservoir performance, our Ora* intelligent wireline formation testing platform helps customers derisk their reserves and production. By providing real-time measurements integration into the Petrel* reservoir model, Ora gives customers opportunities to modify their acquisition program while the equipment is in the well. This allows for delivery of additional measurement services and reduces reservoir uncertainty.
In production operations, we are building digital solutions leveraging our IOT edge platform, Agora*, and our digital automation partner Sensia. In Latin America, in one of our asset performance projects, we solved customer production challenges using digitally connected pumps and a predictive AI solution at the edge. This increased uptime of the equipment, reduced field crew visits by 97%, and increased production in each well by 30%.
Similarly, in integrated well construction, we are deploying internally our commercial DrillPlan* and DrillOps* digital planning, orchestration and automation solutions, built on DELFI, to realize efficiency gains and capture increased value from our performance contracts.
Secondly, our platform gives us opportunities to create new revenue streams, as our customers execute on their digital journeys. Here are two examples:
In September last year, we formed an industry-first, three-party collaboration agreement with Chevron and Microsoft, combining our expertise and resources to accelerate the deployment of DELFI digital solutions on Azure†. I am pleased to report that we have progressed, and last month signed a multi-year contract with Chevron to deploy our digital subsurface across Chevron’s upstream operations, allowing technical users to work seamlessly and efficiently within our DELFI environment.
Two months ago, we launched a multidomain data marketplace, GAIA*, to integrate the industry’s unexploited data and increase the potential for value extraction. There are 13 data providers who have joined the marketplace, allowing customers to access their data along with other data providers’ content—including our own multiclient library. As a content marketplace, GAIA creates new revenue streams that did not exist before.
The power of the platform is real. We are creating and capturing the most value from the industry transition, as we have built an open digital platform that the industry is adopting at scale. The power of the platform goes beyond software, driving efficiency for Schlumberger and the industry while also creating new sources of growth through new digital business models.
As we conclude today, allow me to add my closing remarks.
We are an industry in transition. This new landscape for our industry will demand a step change in returns and a new benchmark in efficiency and performance, with digitalization and decarbonization as imperatives. The ability to respond to this transition—to innovate and collaborate in every basin—will define success for the coming decades.
We created a strategy that is tailored for this new landscape. Our performance strategy is designed for resilience and is executed to deliver results in this new environment—for our customers and our shareholders. We are already benefiting from elements of financial outperformance as we execute the first steps of our strategy at the trough of the cycle.
As we transition into a gradual activity recovery, our performance and returns-focused strategy will allow us to capitalize upon this growth cycle and deliver industry-leading returns, through our capital stewardship, fit-for-basin technology, digital leadership, and unique talent pool supporting our global execution capability.
Ladies and gentlemen, our industry will innovate its way out of this crisis, and the Schlumberger of tomorrow is already here today, leading the path to recovery and to better returns.