SLB Third-Quarter Earnings Call - SLB LIMITED

Financial Performance:

• Third quarter 2026 total revenue reached $9.45 billion, a 5% sequential increase driven by North America land growth, Middle East recovery, and strong international deepwater activity.
• Adjusted EBITDA margin expanded to 21.9%, up 71 basis points sequentially; pre-tax segment operating margins increased across all four divisions.
• EPS (excluding charges) was $0.64, up $0.09 sequentially and down $0.05 year-over-year; results included a $187 million non-cash pension settlement charge.
• Generated $1.5 billion in operating cash flow and $828 million in free cash flow; net debt remained steady at $9.2 billion.
• Capital investments totaled $682 million; full-year CAPEX guidance stands at approximately $2.5 billion.
• Stock repurchases totaled $656 million in the quarter, with a full-year target of approximately $2.4 billion.
• Data center solutions contributed to revenue growth in the "All Other" category, though operating income dipped slightly due to ramp-up costs.

Guidance and Future Outlook:

• Q4 2026 revenue guidance is approximately $10 billion, representing a 5% to 7% sequential increase, assuming Middle East revenue remains flat at ~$1.9 billion.
• Q4 adjusted EBITDA margins are expected to expand by 100 to 150 basis points, driven by digital sales strength and year-end product shipments.
• 2027 global SLB market activity is projected to grow in the mid-single digits, assuming Middle East activity remains at second-half 2026 levels; resolution of conflict would act as a catalyst for upside.
• Core divisions are expected to visibly outperform the broader market in 2027, fueled by long-cycle offshore development, renewed exploration, and production recovery.
• Digital business is targeted to finish 2026 with double-digit year-over-year growth and adjusted EBITDA margins exceeding 35%; double-digit or higher growth is expected to continue into 2027.
• Data center solutions aim to reach a $2 billion annual run rate by the end of 2027.
• The acquired Calvion business is anticipated to accelerate growth as a meaningful engine for the company upon closing in the first half of 2027.

Business Segments and Product Lines:

• Production Systems: Led growth with $4.0 billion revenue (up 6% sequentially); margins expanded 60 basis points to 16.1%. Key drivers include One Subsea awards (including the ExxonMobil Rovuma project), artificial lift, completions, and production chemicals. ChampionX delivered its highest quarterly revenue and margin since acquisition, with margins expanding for the fourth consecutive quarter to mid-20s.
• Well Construction: Revenue reached $2.9 billion (up 5% sequentially) with margins improving 122 basis points to 16.4%, driven by Middle East rebound, Argentina, Guyana, Brazil, and Asian offshore drilling.
• Reservoir Performance: Revenue grew 5% to $1.6 billion; margins increased 140 basis points to 16.3%, supported by evaluation and stimulation activity in the Middle East and Latin America.
• Digital: Revenue was $693 million (flat sequentially) but margins rose 27 basis points to 28%. Key metrics include 750,000 feet of automated drilling (up ~50% YoY) and HiLops monitoring >20% of active international rigs (up >60% YoY). Digital exploration revenue is expected to rebound significantly in Q4.
• Data Center Solutions: Continues strong growth trajectory, expanding into Asia and leveraging the Calvion portfolio for thermal management and heat management in AI infrastructure.

Market and Competitive Landscape:

• Deepwater: First Final Investment Decisions (FIDs) expected to increase >30% YoY in 2026; SLB's One Subsea backlog is strengthening with multi-year awards like the Mozambique project.
• Exploration: Capital is flowing back into exploration due to energy security concerns and reserve replacement needs; SLB participated in ~80% of global high-impact exploration waste evaluations. Key hotspots include Brazil (Pelotas Basin, Pre-Salt), Suriname, Guyana, Namibia, West Africa, and the Eastern Mediterranean.
• Venezuela: Activity is accelerating with international operators increasing CapEx; SLB revenue in Venezuela is on track to double this year, with potential for multifold growth in 2027, potentially reaching historical peak levels of ~$1 billion.
• Middle East: While near-term uncertainty persists, long-term fundamentals are strengthening; Salyu Zaramco awarded SLB integrated well construction contracts for >450 wells over three years.
• North America: Strong performance driven by land-based production recovery, digital adoption, and the emerging data center market.

Risks and Challenges:

• Geopolitics: Ongoing tensions in the Middle East pose a risk to revenue visibility; Q4 and 2027 guidance assumes a flat Middle East revenue scenario with no further escalation.
• Integration: The Calvion acquisition closing is subject to regulatory filings and integration execution in the first half of 2027.
• Cost Inflation: Chemical inflation pressures remain a factor, though ChampionX synergies are currently offsetting these costs.
• Pension Liabilities: A significant one-time non-cash pension settlement charge occurred, though the plan remains well-funded and volatility is reduced.
• Market Sensitivity: Future growth remains partially dependent on crude oil price stability and the resolution of regional conflicts to unlock deferred activity.

Management Commentary and Tone:

• Management expressed strong confidence in an "inflecting upcycle," citing broad-based activity increases across exploration, development, and intervention globally.
• Tone was optimistic regarding the structural shift toward energy security and reserve replacement, highlighting a "durable multi-year international investment cycle."
• CEO Olivier Lepouche emphasized that the company's diversified portfolio, particularly in production recovery and deepwater, positions SLB to outperform the market in 2027.
• CFO Stéphane Biguet highlighted the resilience of margins despite inflation and the strategic importance of the Calvion deal for the AI infrastructure build-out.
• Management noted that while the Middle East remains a "swing factor," the global outlook is supported by diverse markets independent of the region's resolution.

Analyst Questions and Answers:

• Growth Drivers: Analysts asked which segments will grow fastest; management indicated deepwater, production recovery, and digital operations are the primary accelerants.
• Middle East Resilience: Questions regarding growth resilience if crude moderates to $65-$70 were answered with a focus on energy security mandates and inventory drawdowns necessitating long-term investment regardless of short-term price fluctuations.
• Venezuela Potential: Management stated the trajectory points to multiple-fold growth in 2027, potentially exceeding historical peak revenues of ~$1 billion.
• ChampionX Performance: The integration team is successfully scaling the business internationally; margins are in the mid-20s, with full synergy targets of $200 million expected by end-of-year.
• One Subsea Visibility: Management expects backlog bookings to exceed the $9 billion target set over two years, providing visibility into 2027-2029 revenue.
• Data Center Expansion: While the focus remains on North America, expansion into Asia is underway; Calvion will enhance the ability to capture higher share of wallet per gigawatt through engineered thermal solutions.
• Digital Growth: Digital is expected to maintain double-digit growth in 2027 driven by three vectors: digital operations, the exploration upcycle, and emerging AI capabilities (Lumi, Tela).

Other Key Points:

• The company has established a leadership position in global production systems, holding >50% of its portfolio in production/recovery segments.
• SLB's "All Other" category growth is heavily influenced by the data center solutions business, which is on track to surpass $1 billion in annualized run rate by year-end.
• The integration of ChampionX has resulted in higher-than-expected synergies, offsetting chemical inflation and driving consecutive quarter margin expansions.
• The company is actively mobilizing resources for Venezuela and the Middle East integrated contracts, with capacity to ramp up significantly upon conflict resolution.
• A new manufacturing center in Canada has been established to support the Meta data center project and other hyperscaler demands.