SLB Third-Quarter Earnings Call - SLB LIMITED

Financial Performance:

• Third-quarter revenue reached $9.45 billion, a 5% sequential increase, driven by a 13% recovery in the Middle East ($1.9 billion), strong North American land activity, and international deepwater momentum.
• Earnings per share (excluding charges/credits) was $0.64, up 9 cents sequentially, though down 5 cents year-over-year due to a $120 million non-cash pension settlement charge and $30 million in M&A integration charges.
• Pre-tax segment operating margins expanded 104 basis points sequentially; adjusted EBITDA margin rose to 21.9%, up 71 basis points.
• Cash flow generation included $1.5 billion in operating cash flow and $828 million in free cash flow, with a full-year capital investment run-rate of approximately $2.5 billion.
• Net debt remained steady at $9.2 billion; stock repurchases totaled $656 million in the quarter, with a full-year target of $2.4 billion, aligning with a total shareholder return commitment of slightly above $4 billion for 2026.

Guidance and Future Outlook:

• Q4 2026 revenue is projected at approximately $10 billion (5-7% sequential growth), assuming Middle East revenue remains flat at ~$1.9 billion; global revenue excluding the Middle East is expected to grow in the high single-digit year-over-year range.
• Q4 adjusted EBITDA margins are forecast to expand 100-150 basis points sequentially.
• Full-year 2026 Digital Division growth is anticipated to finish in double digits with adjusted EBITDA margins exceeding 35%.
• Long-term 2027 market outlook assumes global oilfield services activity grows in the mid-single digits (assuming Middle East remains at 2026 H2 levels), with SLB core divisions positioned to visibly outperform the market.
• Venezuela is identified as a significant near-term growth driver, with revenue on track to more than double in 2026 and potential for multiple-fold growth in 2027.

Business Segments and Product Lines:

• Production Systems: Revenue of $4 billion (+6% sequentially), led by strong One Subsea awards and ChampionX performance; ChampionX achieved its highest quarterly revenue and margin expansion for four consecutive quarters.
• Well Construction: Revenue of $2.9 billion (+5% sequentially), driven by double-digit growth in Argentina, Guyana, Brazil, and U.S. land, plus a seasonal recovery in Canada and increased Middle East activity.
• Reservoir Performance: Revenue of $1.6 billion (+5% sequentially), with margin improvement driven by Middle East recovery; reflects customer investment in production optimization and reservoir evaluation.
• Digital: Revenue of $693 million (flat sequentially); delivered >750,000 feet of automated drilling (up ~50% YoY); Hillops now monitors >20% of active international rigs (+60% YoY).
• Data Center Solutions: Continued strong growth with new manufacturing capacity in Canada; revenue projected to exceed $1 billion run-rate by year-end and $2 billion by end of 2027.
• M&A: Acquisition of Kelvion (Calvion) is progressing with closing expected in H1 2027, expected to accelerate entry into AI infrastructure and thermal management markets.

Market and Competitive Landscape:

• Global industry entering an inflecting upcycle driven by energy security needs, reserve replacement requirements, and declining production rates.
• Deepwater activity is accelerating with FIDs expected to grow >30% YoY in 2026; One Subsea backlog strengthens with awards in Mozambique (ExxonMobil Rovuma) and others across Latin America, Africa, and Asia.
• Exploration activity is rebounding across frontier basins (Namibia, Suriname, Brazil's Pelotas, West Africa) and conventional plays (Middle East), with SLB participating in ~80% of high-impact exploration wells globally.
• SLB maintains a leading position in production recovery, with its portfolio now >50% focused on production and recovery, offering resilient exposure to both short-cycle OPEX and long-cycle CAPEX.

Risks and Challenges:

• Geopolitical instability in the Middle East remains a primary near-term risk, though management assumes flat revenue for Q4; a resolution could unlock deferred activity and serve as a catalyst for 2027 growth.
• Inflationary pressures on input costs (particularly chemicals) continue to challenge margins, though synergies from the ChampionX integration are offsetting these costs.
• Pricing pressures on large tenders and cost increases related to ramping up new data center project execution capacity.
• Execution risks associated with the integration of the Kelvion (Calvion) acquisition and scaling of data center solutions.

Management Commentary and Tone:

• Tone is highly confident and optimistic, describing the current environment as an "inflecting upcycle" with broad-based growth across all regions and divisions.
• Management emphasized the "durable multi-year international investment cycle" supported by long-cycle offshore projects, renewed exploration, and the activation of previously sanctioned markets like Venezuela.
• Strong emphasis on strategic execution, particularly regarding the successful integration of ChampionX and the scaling of the digital and data center businesses.
• CEO Olivier Lepouche and CFO Stéphane Biguet expressed certainty in SLB's ability to outperform the market in 2027 due to differentiated exposure to the strongest activity areas.

Analyst Questions and Answers:

• Growth Drivers: Analysts asked about specific growth levers; management confirmed broad-based strength in deepwater, production recovery, and exploration, with Venezuela and North American unconventional activity being key short-term catalysts.
• Market Resilience: Questions regarding crude price sensitivity ($65-$70) were answered by asserting that energy security and reserve replacement needs provide a floor for investment, making the cycle resilient even if oil prices moderate.
• Middle East Margins: Inquiry on margin normalization; management indicated that while current disruption is a drag, future capacity leverage and reduced inflation will lead to strong operating leverage upon conflict resolution.
• ChampionX Performance: Analysts highlighted the unit's mid-20s EBITDA margins; management confirmed synergies are exceeding targets ($200M annual run-rate), with further international upside expected.
• Data Center M&A: Questions on future M&A appetite; management stated focus is on closing Kelvion and executing existing backlog before considering further strategic acquisitions in the space.
• 2027 Outlook: Clarification was given that 2027 guidance assumes flat Middle East activity, but a resolution would add significant upside; SLB expects to outperform the projected mid-single-digit global growth.

Other Key Points:

• The acquisition of Kelvion (Calvion) will integrate thermal management and heat management technologies to support the AI infrastructure build-out.
• SLB's "One Subsea" portfolio secured a major award for the ExxonMobil Deepwater Rovuma project in Mozambique, contributing to global gas supply and extending backlog visibility to 2029.
• The company is actively expanding its data center manufacturing footprint, including a new facility in Canada to support Meta projects and satellite capabilities in Asia.
• A dedicated pension risk management initiative reduced the plan's obligations and assets by ~$900 million, lowering future volatility and costs.
• Digital adoption is accelerating, with AI and predictive analytics (Hillops, Lumi) becoming distinct growth vectors alongside traditional exploration and operations.