Schlumberger Limited (SLB) Q4 2021 Earnings Call Transcript

Schlumberger Limited  (NYSE: SLB) Q4 2021 earnings call dated Jan. 21, 2022

Corporate Participants:

Ndubuisi Maduemezia — Vice President of Investor Relations

Olivier Le Peuch — Chief Executive Officer

Stephane Biguet — Executive Vice President and Chief Financial Officer

Analysts:

James C. West — Evercore ISI — Analyst

J. David Anderson — Barclays Capital — Analyst

Chase Mulvehill — Bank of America Merrill Lynch — Analyst

Arun Jayaram — J.P. Morgan — Analyst

Scott Gruber — Citi Research — Analyst

Connor Lynagh — Morgan Stanley — Analyst

Roger Read — Wells Fargo Securities — Analyst

Neil Mehta — Goldman Sachs and Company — Analyst

Keith Mackey — RBC Capital Markets — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Schlumberger Earnings Conference Call. At this time, all participant lines are in a listen-only mode. Later, there will be an opportunity for your questions. Instructions will be given at that time. [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.

Ndubuisi Maduemezia — Vice President of Investor Relations

Thank you, Lia. 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’ll 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’ll turn the call over to Olivier.

Olivier Le Peuch — Chief Executive Officer

Thank you, ND. Ladies and gentlemen, thank you for joining us on the call today. In my prepared remarks, I will cover our Q4 results and full year of 2021 achievements. Thereafter, I will follow with our view of the 2022 outlook and some insight into our near-term financial ambitions. Stephane will then give more detail on our financial results and we will open for your questions.

The fourth quarter was characterized by broad based activity growth. With continued momentum in North America, activity acceleration in the Russian markets and a captive offshore market contribution. Upon which, we delivered strong sequential revenue growth, our sixth consecutive quarter of margin expansion and outstanding double-digit free cash flow generation. These financial results conclude an exceptional year of financial performance for Schlumberger at a pivotal time for the company and in our industry at large.

Underlying these results are the following highlights from the quarter. Geographically, sequential growth in North America exceeded rig activity, growing in excess of 20% offshore and international revenue growth accelerated closing the second half of 2021, up 12% versus the prior year. Our international areas posted growth driven by gains in more than 75% of our international business units.

By division, revenue in all four divisions grew sequentially and when compared to the same period last year. Digital Integration led growth posting double-digit sequential growth and record high margins. Well Construction and Reservoir Performance are predominantly service oriented divisions, outperform expectations with strong sequential growth and approximately 30% growth year-over-year on a pro forma basis.

Production Systems recorded year-end sales, which drove mid single digit growth, though partially impacted by logistics change. Operating margins expanded in spite of seasonality effect improving further beyond pre-pandemic levels. And finally, we generated outstanding cash flow from operation exceeding $1.9 billion in the quarter. All in all, I am very pleased with our operational execution, our safety performance and our financial results through the fourth quarter.

Now, let me briefly reflect on what we achieved in 2021. In our core, we fully operationalized our returns focused strategy, leveraging our new division and best in organization to seize the start of the up cycle. In North America, this resulted in full-year top line revenue growth, excluding the effects of divestiture and significantly expanded margins, achieving double-digits, one of the financial targets we laid out in 2019.

Internationally, we also grew the topline and expanded margin significantly as international activity strengthened in the second half of the year. This also resulted in full year international margins that exceeded 2019 levels. Taken together, these margins resulted in the highest global operating margins of the last six years, setting an excellent foundation for further expansion as activity accelerates and market conditions further see both pricing improvement.

In digital, our second engine of growth, I’m very proud of the momentum we’d established during the year. We advanced on our goals to expand market access and accelerate adoption of our platform, AI capabilities and powerful digital tools to reduce cycle time, improve performance and lower carbon intensity. We built partnerships to achieve comprehensive cloud access globally, collaborated with AI innovators to deploy machine learning and AI solutions and enabled digital operations through the automation of key workflows in well construction and production operation.

At the end of 2021, we have more than 240 commercial Dext customers, recorded more than 160% Dext user growth year-over-year and so more than 10-fold increase in compute cycle intensity and a difficult platform. We also made significant production of data business stream and digital operation, advancing our commercial offerings, autonomous drilling and the adoption of Angola edge AI and IoT solutions with great success.

The Q4 results including significant uptake in digital sales and sizable income of the margin are clear testament of this success. In Schlumberger new energy, we continued to advance development of clean-energy technologies and low carbon projects. In 2021, we took a position in stationary energy storage, expanding our total addressable market and advanced all of our venture in hydrogen, lithium, geo-energy and a suite of CCUS opportunities including our bioenergy CCS project.

Some notable milestones achieved include the signature of pilot agreements with Genvia, our hydrogen venture with ArcelorMittal, Ugitech, Vicat and Hynamics, leading company in steel and cement. And with our geo-energy venture, we secured five commercial contracts in Europe and one in North America for a prestigious university campus.

This was also pivotal year for us in terms of our commitment to sustainability. We announced our comprehensive 2050 net zero commitments inclusive of Scope 3 emissions and announced the Transition Technology portfolio to focus on the decarbonization of oil and gas operation with much success. In addition, Schlumberger earned a double-A rating by MSCI and won an ESG top performer award by Hart Energy, recognizing our sustainability efforts, our enhanced disclosure and a commitment to apply our technology and capabilities towards helping the world meet future energy demand.

In summary, 2021 was a great year for Schlumberger. Beyond this operational and financial results and our ESG accomplishments, we made excellent progress in our core, digital and new energy, the three engines of growth that bought us success now and well into the future. Above all, I’m most proud of our people. Their unique ability to execute, mobilizing operation across the world for numerous constraints, adapting logistics and supply chain dynamics and setting new performance benchmark, all of which are in the whole condition of our customers.

I would like to thank the entire team for this being a year of outperformance on every metric. This will pass all of our target this year and created external 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, multi-year market growth. Tight oil supply and demand growth beyond the pre-pandemic peak, our project that resulted in a substantial step-up in capital spending amid shrinking spare capacity, declining inventory balance and supportive oil price.

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 period of stronger short-cycle activity resurgence, driven by improved visibility into the more recovery and greater confidence in the oil price environment. And as oil demand exceeds pre-pandemic levels in 2023 and beyond, long cycle development will augment capital spending growth in response to the global supply.

This demand led capital spending growth sets the foundation for a strong multi-year upcycle. Indeed, this scenario has already been established as the number of FID increases, service pricing has begun to improve and multi-year long cycle capacity expansion plans are 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 area and operating environments, short and long cycle including deep water are expected to post strong growth with upside potential as omicron disruptions dissipate as they advance.

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 margin on a full year basis, exiting the year of EBITDA margins at least 200 bps higher than the fourth quarter of 2021. In this context in, 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 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 give 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.

Stephane Biguet — Executive Vice President and Chief Financial Officer

Thank you, Olivier, and good morning ladies and gentlemen. Fourth quarter earnings per share excluding charges and credit 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 a sale of a portion of our sales 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 and integration. From a geographical perspective. International revenue grew 5%, while North America grew 13%. Pre-tax 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 sustained overall margin despite seasonality effects in the northern hemisphere. Company wide 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 and 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 the 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%, 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 sales 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 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 over the last five years. During the year, we also continued to reduce gross debt by repaying $1 billion 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 as compared to just under a $1.7 billion in 2021. This increase will allow us to fully seize the multi-year 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, out 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 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 the 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.

Questions and Answers:

Operator

[Operator Instructions] And our first question is from James West with Evercore ISI. Please go ahead.

James C. West — Evercore ISI — Analyst

Hey, good morning, Olivier.

Olivier Le Peuch — Chief Executive Officer

Good morning, James.

James C. West — Evercore ISI — Analyst

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 higher target and I’m curious what are the key drivers around that confidence increase?

Olivier Le Peuch — Chief Executive Officer

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 CAGAR growth over a few years. So in 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’ll 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 [Indecipherable] are here to stay. And this was already very visibly impacting the service oriented division, well construction and reservoir performance as you have seen throughout the year and partly the second half of last year. And we saw, where this will pass already the 2018 margins performance.

Secondly, I think the market mix. The market mix is set to improve and resonate to our perspective of strength. Increased offshore activity mix has already started to happened and we expect this to only accelerate as the year unfolds and further into 2022. The adoption of technology also is accelerating as we have seen including digital, but our fit for basin, our Transition Technology and all the technology that extract performance for our operation are making an impact today and are getting further adoption by customer and giving us opinion.

And thirdly pricing. Well, a year ago, we’re talking about the initial pricing in North America. Today, we are seeing and we are already recording ton of passing improvements on 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 developed, we believe that these attributes, our foundation, operating leverage, our performance, that decision and execution give us a premium, our market mix, our technology adoption, success with customer and finally pricing giving a tailwind to this will drive and further expand our margin to 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 on this into 2022.

James C. West — Evercore ISI — Analyst

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. I’d like just a little more color on the cadence would be very helpful.

Olivier Le Peuch — Chief Executive Officer

Maybe in one word, the market will be — growth will be very broad across all geographical, first as a backdrop. I think that’s what we are realizing and that’s quite unique. But I think you’ve had to characterize first geographically or very high level. I think it’s possible to tail off to us with North America leading a peak of growth, activity growth in the first half, international further accelerating in the second half where 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.

James C. West — Evercore ISI — Analyst

Okay.

Olivier Le Peuch — Chief Executive Officer

Secondly, I believe that if I had to characterize what will lead and be accretive to growth, I would say Americas lands because of activity uptick, but I will also put offshore environment and Middle East. These are the three engines of growth that we pulled this year growth to the target ambition we have put up mid-teens. So now per division. I think the service oriented division of reservoir performance and well construction will be accretive to this we expect followed by — because they are benefiting from structural environment, they’re benefiting from the pricing and they have strong both NAM and international presence. So their ability from long cycle exposure and technology mix probable.

In addition, the pollution system 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 we’ll 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 moderated by — visibly moderated by a flattish environment for APS pollution going forward. So that give you the mix across the division and across the geographies.

James C. West — Evercore ISI — Analyst

That’s perfect. Thanks Olivier.

Olivier Le Peuch — Chief Executive Officer

You’re welcome.

Operator

Our next question is from David Anderson with Barclays. Please go ahead.

J. David Anderson — Barclays Capital — Analyst

Hi, good morning Olivier. So you gave — you laid out the margin expansion in 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 [Indecipherable] contract to the Middle East, but I guess typically what we’ve seen in the past is in these mobilization periods that there’s kind 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 is you’re going to have to absorb in ’22 and that therefore kind of 23% sort of another margin uplift there or has that improved pricing and some of these contracts kind of accounted some of those mobilization? I think you had said something about getting better pricing for mobilization. So if you could just comment.

Olivier Le Peuch — Chief Executive Officer

Yeah, I think Dave, I think, it’s part of the mix of execution that we have and I think we always mobilize for new product 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. Yes, 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 startup. We are working for customer to minimize while using digital operation to remote and optimize the prominent resource and we believe that what we have done in last quarter will continue to do in 2022. So, I think directionally, we are set to improve our margin internationally in 2022 despite and willing on this new project. So, we are very keen to start of 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 the customer to get full recognition of our investment.

J. David Anderson — Barclays Capital — Analyst

Understood. Okay. On the Digital Integration side, you grew really nice in the top line 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 if secondly 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’d be really appreciated?

Olivier Le Peuch — Chief Executive Officer

Yeah, let me give you a little bit of a color into this. First, I think if I had to characterize, I think the uptick we’ve seen in digital sales at the end of the year, it’s not a pure year end sales effect on one or two large contract and one or two application and software sales. It’s broad, it’s very diverse, it’s touch and expand upon the platform strategy that develop different revenue streams.

So, it’s about new Dextcloud customer and you have seen we have announced in the progress one more time in last quarter. It’s about new revenue monetization in digital operation including reservoir, including drilling, remote operation and automation. It’s about new data business stream where we have been securing contract for OSU foundation where we are the first to commercialize on surprised data management solution on digital and is the follow through on the enterprise contract that we have room in 2021 or in 2020 on Dext adoption.

So it’s significant, its relates to the progress we have made in our platform, it relates to the acceleration of digital adoption by our customer and digital transformation by customer and it translate into an uptick in each and every of the digital revenue stream we have created and the success from data to workflow and to operation. So, it’s diverse, it’s broad and is multifaceted. So, it’s here to continue to expand.

So, I’m positive on this because it’s not a one off if you see days, year-end sales effect there that we’re not — they would not repeat in the first quarter, but at the same time, it’s something that I see expanding as a platform going forwards. And we are in the early innings of this adoption. As we mentioned a quarter ago, we had — we have 1700 digital customers and we are in the early innings of deploying and pursuing this large installed base with a digital transformation. So I am, it’s — we’re in the first cycle of this digital expansion and digital adoption, I trust this will continue in 2022 and accelerate beyond.

J. David Anderson — Barclays Capital — Analyst

Thank you.

Operator

And our next question is from Chase Mulvehill with Bank of America. Please go ahead.

Chase Mulvehill — Bank of America Merrill Lynch — Analyst

Hey, good morning everybody.

Olivier Le Peuch — Chief Executive Officer

Hi Chase.

Chase Mulvehill — Bank of America Merrill Lynch — Analyst

Hey, good morning, Olivier. So I guess 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 substantial increase in spending this cycle. So, maybe you did — you framed 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 then 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 in activity and where you see the most opportunity for growth? And then ultimately what this could mean for pricing this cycle for OFS companies?

Olivier Le Peuch — Chief Executive Officer

Thank you. A great question. I think the fundamental as we see them have not changed and actually some characteristic of the cycle have accelerated, I’ve been accentuated in the recent months. So, the first attributes that we put first is the outlook of economic GDP growth that considering the oil intensity and energy intensity will steal and will drive the old demands as the key attributes beyond the previous peak, no later in the end of this year, according to the latest projection and is set to expand visibly beyond, not only in 2023, but in 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 will go almost kind of tight that we are facing is pumping not only an uplift on to the commodity price, but also is pumping the investment — return to investment across the broad portfolio of our customers. So you have seen it in North America, bo surprise, but North America is still and will remain structurally smaller than previous cycle due to the capital discipline, but also due to the contract supply including on the services side.

Secondly, I think the international under investments for the last few years, actually the last downcycle, combined with the deep in the last two years is claiming condition for say injection of short cycle capital and then long cycle capital investments to respond to the supply. So, we are seeing growth in North America, albeit are capped. We are seeing a rebound — 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 and by some OPEC member to secure future supply market share, but also the international end measure of investing into their advantage offshore basins.

And we are seeing not only infill drilling, but we are seeing FID for offshore that’s accelerating going forward. So it’s a mix of offshore rebound, including deep water, international short cycle and all 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 condition.

Chase Mulvehill — Bank of America Merrill Lynch — Analyst

Okay, perfect. I appreciate the color. A follow-up to that would be obviously with this constructive backdrop for Schlumberger in 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 you 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?

Stephane Biguet — Executive Vice President and Chief Financial Officer

Hi, Chase, it’s Stephane, look, I like your expression on free cash flow. It was indeed quite quite strong last year with $3 billion. Now. Indeed we visibly accelerated 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, we’ve done 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 shareholder, as well as fund the 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. With respect 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 will get more details when we give you that more comprehensive framework again.

Chase Mulvehill — Bank of America Merrill Lynch — Analyst

Okay. Look forward to it. Appreciate the color. I’ll turn it back over.

Stephane Biguet — Executive Vice President and Chief Financial Officer

Thank you.

Operator

Next, we go to the line of Arun Jayaram with J.P. Morgan. Please go ahead.

Arun Jayaram — J.P. Morgan — Analyst

Yeah, good morning. 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 are you seeing from the NOCs versus call it maintenance work versus FIDs and things to increase productive capacity?

Olivier Le Peuch — Chief Executive Officer

I think what we have seen and we are already witnessing today, I think — and is visible in Middle East, but beyond is the short cycle, the return of offshore cycle activity. To assure, as you said maintenance of production and with small, but visible in kind 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 country committing to participate fully and laying out the foundation this year and next year into expanding the supply. But what we should not forget about and it’s true partly true for Middle East is there’s also a gas market that is being very sustained that I’ve seen reinvestment and it’s part of the regional dynamic and that is already seeing — continue to seeing 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 as long cycle acceleration with new FID capacity and this is true from deepwater Brazil to the future investment — and the current and future investment in Middle East for FID, the pipeline in Russia. So that’s again very broad and that combine short and long cycle. And if you were to project, I think 2022 is a supply led activity rebounds and 2023 would it be a demand led activity growth and the capacity expansion, the long cycle will further — would further contribute going forward into 2023.

Arun Jayaram — J.P. Morgan — Analyst

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 to — go ahead.

Olivier Le Peuch — Chief Executive Officer

As we exit — it’s an exit rates, we made the comparison 200 bps or higher as we exit 2022 when compared to the second half of Q4 of 2021. [Speech Overlap]

Arun Jayaram — J.P. Morgan — Analyst

Exactly. Okay, got it, exit rate. So as we think about 2023, your outlook is that you could reach or exceed a mid-cycle EBITDA margin of 25%…

Olivier Le Peuch — Chief Executive Officer

Second half — yeah, in the second half — we expecting in the second half to reach or exceed indeed.

Arun Jayaram — J.P. Morgan — Analyst

Great. And I just wanted to comment on the drivers of that would be just mix and just further pricing improvement.

Olivier Le Peuch — Chief Executive Officer

I think, again — as I commented in a previous question, I think operating leverage will continue to give us a full through as we continue to leverage the structural 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 basin, we will surpass it to the mix further. And finally pricing would expand. So, I think this is the combination that give us more confidence that we reached this mid-cycle prior to previous anticipation.

Arun Jayaram — J.P. Morgan — Analyst

Great, thanks a lot.

Olivier Le Peuch — Chief Executive Officer

Thank you.

Operator

Our next question is from Scott Gruber with Citigroup. Please go ahead.

Scott Gruber — Citi Research — Analyst

Yes, good morning.

Olivier Le Peuch — Chief Executive Officer

Good morning, Scott.

Scott Gruber — Citi Research — Analyst

Morning. So, it’s clearly your capital intensity is going to be down versus last cycle, but just given the 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 multi-year growth cycle that will hope unfolds?

Stephane Biguet — Executive Vice President and Chief Financial Officer

So look, Scott, it’s 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 all capitals to entry program as well, but where we deploy assets only to the the best returns countries and contracts. So, now for 2022, we are looking at spending total capital investments including APS between $1.9 billion 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 that 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 of contracts that allow us to do that at favorable commercial conditions. So, we’ll see how the year progress, but for the moment, we are quite confident that the envelope we gave you allow us to fully see 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.

Olivier Le Peuch — Chief Executive Officer

But we will 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 of customer. And we have the all organization focused on effectively and efficiently using the cut back the equipment pool that we have to deploy to the most accretive contract and most accretive engagement we have. So we will continue to use this discipline to make sure that we keep in check broadly the capital intensity in this cycle.

Scott Gruber — Citi Research — Analyst

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 be APS portion stepped down on an annualized basis?

Stephane Biguet — Executive Vice President and Chief Financial Officer

So look, we don’t disclose the split of the guidance. There is a small increase in APS investment, but it’s much 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 on that side 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 the future years.

Scott Gruber — Citi Research — Analyst

Yeah. I appreciate the color. Thank you.

Stephane Biguet — Executive Vice President and Chief Financial Officer

Thank you.

Operator

Our next question is from Connor Lynagh with Morgan Stanley. Please go ahead.

Connor Lynagh — Morgan Stanley — Analyst

Yeah, 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 what 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?

Olivier Le Peuch — Chief Executive Officer

I think it’s broad based, but let me maybe underline what, where and how we see passing condition getting developed I think and we see it in three ways. First, we believe that passing condition and commercial term are linked to performance. So, our performance in execution, performance contract differentiated in the impact we provide to customer give us the opportunity to negotiate favorable commercial terms and keep expand our market position with key customers. So I think this has started and this is depending on region. This is something that impacts our service division I will say, 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, bit for offshore deployments, albeit for high volume intensity basins like North America. So, this, we have seen on the condition assets and we are getting opportunity to expand from shop to broad passing improvement condition. So this we have seen happening for the last year in North America and we see this starting to have put in offshore deployments brands where a unique equipment has to be mobilized, have to be secured and they are then at pricing condition that improve over the last few months.

Finally, inflation. Inflation is something that exist. It’s related to market condition. Efficiency 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 [Indecipherable] as we call it over the years and we know how to manage it to engagement of customer, is more acute, is more pronounced in some basin and we’re responding it with engagement of our customer and using the contract term we have to offset the inflation pressure we’re getting.

So it’s about our performance, including our technology, it’s about capacity tightening and it’s about responding to the inflation pressure. So, these three things are delivery we are using and that I think the more broad reach of them across the different basin. Hence, its progressive and it’s touching and addressing different basin and all divisions throughout 2022 and further in ’23.

Connor Lynagh — Morgan Stanley — Analyst

Thank you. 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 the 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?

Olivier Le Peuch — Chief Executive Officer

I think — first, I think as you mentioned, I think inflation is nothing new and it 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 cap net passing condition. So, I think we see this happening forward.

And when it comes to resource versus equipment, I think resource ease is always a hot topic in organization. But I think we respond to these by further improving and accelerating our digital operation adoption, so that we offset some of the push on our resource 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 will continue to tune as the cycle unfolds.

Connor Lynagh — Morgan Stanley — Analyst

Great, thanks very much.

Olivier Le Peuch — Chief Executive Officer

Thank you, Connor.

Operator

Our next question is from Roger Read with Wells Fargo. Please go ahead.

Roger Read — Wells Fargo Securities — Analyst

Yeah. Thank you and good morning.

Olivier Le Peuch — Chief Executive Officer

Good morning. Roger.

Roger Read — Wells Fargo Securities — Analyst

Certainly good to see things turning around here. I just had a couple of questions, follow-up on some of the discussions about the 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?

Olivier Le Peuch — Chief Executive Officer

Yeah, 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 cells as part of the — so the E&A is albeit very compressed compared to the peak of the last cycle, I think is seeing a resurgence for two reasons: first customer are trying to assess and reassess their reserve 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, partly offshore get to accelerate the return on the existing infrastructure and get fast track short cycle return on the existing offshore.

So we see that in Latin America, we see that in Gulf of Mexico, in Europe, in West Africa. This is very broad. So, we are benefiting from it in our high level performance. We’re benefiting from it in some of the key technology that we provide including in digital. So, I think while it has — it has been a step down compared to previous cycle, there is a keen interest and investment resurgence in E&A for this reason. And I think we see that as a backup of FID and is true partly offshore.

Roger Read — Wells Fargo Securities — Analyst

I appreciate that. Thanks. And then just looking at the digital and Integration segment. It’s obviously one lot of us are focused on. 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 has 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 is anything internal as well.

Olivier Le Peuch — Chief Executive Officer

No, internal. I think we are very pleased with progress of the deploying and continue to build the digital foundation and digital platform foundation that [Indecipherable] 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 open data ecosystem foundation, the choice we have made to go in partnership with different cloud provider, different industry partner to expand our market reach has unlocked some of this customer to come and join us in our digital journey with our platform.

So it’s, — we continue to work on it. The last two years could have been better on larger adoption possibly. But I think we have the foundation in place. We are in the early innings, as I said of full adoption. Concerning the size — the oversize — the 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. So 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.

Roger Read — Wells Fargo Securities — Analyst

Great. Thank you.

Olivier Le Peuch — Chief Executive Officer

Thank you.

Operator

Our next question is from Neil Mehta with Goldman Sachs. Please go ahead.

Neil Mehta — Goldman Sachs and Company — Analyst

Good morning team.

Stephane Biguet — Executive Vice President and Chief Financial Officer

Morning.

Olivier Le Peuch — Chief Executive Officer

Morning, Neil.

Neil Mehta — Goldman Sachs and Company — Analyst

The first question is the modeling specific one, working capital, obviously, a big positive item this quarter. Can you talk about, if you see it unwinding over the course of the year? And any just thoughts on trajectory there. And as it relates to that, Liberty looks like, you sold $109 million shares in the quarter, as it relates to that, should we think of that as a ratable exit as this run rate in the open market? Or are you going to be opportunistic around share price? Thank you.

Olivier Le Peuch — Chief Executive Officer

Thank you, Neil. So, working capital indeed was significantly lower in the second half, especially Q4 and again this was very strong customer collections and customer advances. So, looking at 2020, do we expect the same pattern, very seasonality in working capital. Usually the — it increases in the first quarter and we have payment of annual incentives to employees and then gradually it improves in the subsequent quarters mostly on cash collection.

So, we’ll see the same in 2022. We will likely be higher levels in general of working capital consumption as activity accelerates, particularly considering the exit rates we are looking at, but we’ll strive to maintain this to a minimum. And in any case, we still want to generate double-digit free cash flow margins and that’s inclusive of any working capital movement.

So that helps us managing within this boundary. As to Liberty, yes, we are quite happy with our equity stake has actually improved quite a bit since the transaction was announced. We did decide to monetize part of this — to start monetizing part of the investment following the expiration of the lock-up period. We still hold a significant share of the equity, as I highlighted, about 31% after the transaction. So, we’ll continue to monitor on the value of the investment going forward. Then we will decide on further on monetization based on market conditions.

Neil Mehta — Goldman Sachs and Company — Analyst

Thanks Olivier. 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…

Olivier Le Peuch — Chief Executive Officer

I think we are routing to re-engage with all of you in a live session first and foremost. We’ll want to layout clearly our strategic framework going forwards in the cycle and beyond, including our three engine 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 shareholder. 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.

Neil Mehta — Goldman Sachs and Company — Analyst

Perfect. Looking forward to seeing you live.

Olivier Le Peuch — Chief Executive Officer

Indeed. Thank you. I believe we have time for one last question. Operator.

Operator

Very good. That last question is from Keith Mackey with RBC Capital Markets. Please go ahead.

Keith Mackey — RBC Capital Markets — Analyst

Hi, good morning.

Olivier Le Peuch — Chief Executive Officer

Good morning, Keith.

Keith Mackey — RBC Capital Markets — Analyst

Yeah, I just wanted to maybe break — ask you to dig in to 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?

Olivier Le Peuch — Chief Executive Officer

Yeah, 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 variable at play to decipher here. So, but to your specific question, we foresee indeed that the U.S. land, which is a big portion of this activity outlook, we’ll be having a bias towards well construction, as the market is rotating from depleting the ducts to replenishing the ducts, hence well construction rig activity is — will be the lead in the 20% plus.

And I think we are set to respond to this with well construction portfolio in that environment. And this would be a very favorable to us. And the offshore environment is broad and I think offshore environment will be execution of well construction and also as our performance. And so, when you put all of this and you put the more modest and more moderate Canada environment, you have a mix that is favorable to our construction and production system in the U.S. lands and favorable to our — through our reservoir performance and well construction offshore environments, all of which combine to give us this ambition, about 20%.

Keith Mackey — RBC Capital Markets — Analyst

Perfect, thanks for that. 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?

Stephane Biguet — Executive Vice President and Chief Financial Officer

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 assets. So we are not under turning those offers at the moment. The the asset is now generating very strong cash flows, but we remain open to all options.

Keith Mackey — RBC Capital Markets — Analyst

Perfect. Thanks very much.

Olivier Le Peuch — Chief Executive Officer

Thank you. So I believe we can close the call. So before we close the call. I would like to leave you with few takeaways. Firstly, the quality of our results during the fourth quarter, the cash flow generation and our digital sales have helped us close a remarkable year. We finished with outperformance during 2021, supporting significant EBITDA margin expansion and very sizable reduction of our net debt. Credit to the entire Schlumberger team for excellent 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 position technology and the successful acceleration of our new energy venture each developing towards a sizable addressable market. Thirdly, during 2021, we have advanced sell market position with key customers ahead of the significant up cycle and will reap full benefit from the scale and breadth of the favorable activity mix unfolding across all basins during ’22 and beyond.

This has resulted in significant growth and further margin expansion and we see double-digit free cash flow ambition. Finally, the macro environment is supportive of a potential super cycle. As these favorable market condition extend both onshore and offshore well beyond 2022, we have increased confidence in reaching our mid cycle 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 the unique environment to substantially build upon our success and accelerate our growth into the future. Thank you very much.

Operator

[Operator Closing Remarks]