SLB Third-Quarter Earnings Call - SLB LIMITED

Financial Performance:

• Third quarter revenue reached $9.45 billion, a 5% sequential increase driven by Middle East recovery, North American land growth, and international offshore activity.
• Adjusted EBITDA margin expanded 71 basis points to 21.9%, with pre-tax segment operating margins rising 104 basis points across all divisions.
• Earnings per share (EPS) excluding charges was $0.64, a 9-cent sequential increase; results were impacted by a $187 million non-cash pension settlement charge ($0.12) and integration charges.
• Cash flow from operations totaled $1.5 billion, generating $828 million in free cash flow; full-year free cash flow is expected to step up in Q4.
• Net debt remained flat at $9.2 billion; the company repurchased $656 million of stock during the quarter and aims for $2.4 billion in annual buybacks.
• Capital investments were $682 million in Q3, with full-year CAPEX guidance maintained at approximately $2.5 billion.

Guidance and Future Outlook:

• Q4 2026 revenue is expected to be approximately $10 billion, a 5-7% sequential increase, assuming Middle East revenue remains flat at ~$1.9 billion.
• Q4 adjusted EBITDA margins are projected to expand by 100-150 basis points year-over-year.
• Global oilfield services (OFS) market activity for 2027 is forecast to grow in the mid-single digits, excluding Middle East normalization.
• Core divisions are expected to outperform the broader market in 2027, driven by deepwater development, renewed exploration, and production recovery investments.
• Digital growth is anticipated to remain in double digits, while data center solutions are positioned as a significant accelerating growth engine.
• The outlook assumes Middle East activity stabilizes at second-half 2026 levels; a geopolitical resolution could unlock deferred activity and drive upside beyond the baseline.

Business Segments and Product Lines:

• Production Systems: Revenue grew 6% sequentially to $4 billion, leading core divisions with strong OneSubsea awards and Q3 revenue for acquired ChampX reaching record highs.
• Well Construction: Revenue increased 5% to $2.9 billion, driven by double-digit growth in Argentina, Guyana, Brazil, and the Middle East; secured a major multi-year contract in Saudi Arabia covering 450+ wells.
• Reservoir Performance: Revenue rose 5% to $1.6 billion, supported by increased stimulation, intervention, and evaluation activity.
• Digital: Revenue was steady at $693 million; margins remained strong at 28%. Automated drilling reached 750,000 feet (up ~50% YoY), and Hillops monitoring expanded to over 20% of active international rigs.
• Data Center Solutions: Continued strong growth supported by the Meta project and geographic expansion into Asia; on track to surpass $1 billion annualized run rate by year-end.
• M&A: The acquisition of Kelvion (referred to as Calvion in transcript) is progressing with a dedicated integration team, targeting a first-half 2027 closing to enhance thermal management capabilities.

Market and Competitive Landscape:

• The industry is entering a durable multi-year international investment cycle characterized by deepwater expansion, renewed exploration, and production recovery.
• OneSubsea backlog is on track to exceed the $9 billion target, with new awards in Mozambique (ExxonMobil) and other basins extending visibility to 2029.
• Exploration activity is resurging globally, with SLB participating in the evaluation of ~80% of high-impact wells, particularly in frontier basins like Namibia, Brazil (Pelotas), and Suriname.
• Venezuela is identified as a key growth driver, with revenue expected to more than double in 2026 and potential for multiple-fold growth in 2027 as international operators increase capex.
• Global energy security concerns are driving demand for geographically diverse supply, favoring long-cycle offshore projects and renewed exploration investment.

Risks and Challenges:

• Geopolitical instability in the Middle East remains a primary near-term risk, with current guidance assuming revenue flatness rather than recovery.
• Execution risks associated with ramping up capacity for new data center projects and integrating the Kelvion portfolio.
• Inflationary pressures on costs, particularly for chemicals in the ChampX business, though partially offset by realized synergies.
• Potential delays in Foreign Direct Investment (FID) final decisions for deepwater projects despite increasing momentum.
• Margin volatility in 2027 depends on the mix of high-margin core businesses versus lower-margin data center growth.

Management Commentary and Tone:

• Management expressed strong confidence in the inflection to an upcycle, highlighting broad-based sequential growth across all geographies and divisions.
• Tone was optimistic regarding the 2027 outlook, emphasizing SLB's differentiated portfolio in production recovery, deepwater, and digital technologies.
• Olivier Lepouche highlighted the strategic shift toward "production and recovery," noting this portfolio now represents >50% of the business.
• Stéphane Biguet noted the successful de-risking of the largest pension plan through the settlement, reducing future volatility.
• Executives reiterated commitment to returning cash to shareholders, with 2026 total returns targeted slightly above $4 billion.

Analyst Questions and Answers:

• Growth Drivers: Management confirmed that all divisions (digital, deepwater, production recovery) are poised for growth, with exploration and Venezuela acting as key accelerants.
• Oil Price Resilience: When asked if growth would hold at $65-$70 crude, management argued that energy security and depleted reserves make the cycle durable regardless of short-term price fluctuations.
• Middle East Margins: Q&A clarified that while current disruptions pressure margins, a resolution will unlock significant operating leverage as resources remain on standby, leading to strong margin expansion.
• ChampX Performance: CEO praised ChampX for consecutive margin expansions and stated synergy targets ($200M) will be met by end of 2026, with international expansion opportunities opening post-conflict.
• Data Center M&A: Management indicated a near-term focus on organic growth and executing the Kelvion integration rather than additional immediate M&A in the data center space.
• 2027 Margins: Full guidance on margin mix for 2027 will be provided in January, noting that digital and data center growth are key variables.

Other Key Points:

• SLB now monitors over 20% of active international rigs with its Hillops predictive analytics system, representing >60% YoY growth.
• The company is expanding manufacturing capacity for data centers, including a new center in Canada and satellite capabilities in Asia.
• Exploration data participation remains a competitive advantage, with ~80% of high-impact exploration wells evaluated by SLB technologies this year.
• The acquired ChampX business has delivered its highest quarterly revenue and margin since acquisition, signaling successful integration.
• Venezuela revenue is on track to double in 2026, with long-term potential matching or exceeding historical peaks of $1 billion for the region.