Schlumberger Limited (SLB) Q1 2021 Earnings Call Transcript

Schlumberger Limited  (NYSE: SLB) Q1 2021 earnings call dated Apr. 23, 2021.

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 West — Evercore ISI — Analyst

David Anderson — Barclays Capital — Analyst

Chase Mulvehill — Bank of America — Analyst

Scott Gruber — Citigroup — Analyst

Sean Meakim — J.P. Morgan — Analyst

Connor Lynagh — Morgan Stanley — Analyst

Marc Bianchi — Cowen and Company — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Schlumberger Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to the Vice President of Investor Relations, ND Maduemezia. Please go ahead.

Ndubuisi Maduemezia — Vice President of Investor Relations

Thank you, Lia. Good morning and welcome to the Schlumberger Limited first quarter 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 will 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 first quarter press release, which is on our website.

With that, I will turn the call over to Olivier.

Olivier Le Peuch — Chief Executive Officer

Thank you, ND and good morning, ladies and gentlemen. Thank you for joining us on the call. In my prepared remarks today, I will cover three topics. Our first quarter results, our progress on our performance strategy, and finally, our outlook for the second quarter and second half of the year. Stephane will then give more details on our financial results, and we will open the floor for questions.

The first quarter of 2021 was a strong step forward. The quarter unfolded as we anticipated, with acceleration in North America activity and momentum continuing to build in the international markets aside from the usual seasonal effects. We executed very well within that context. We expanded our global operating margins for the third consecutive quarter, and free cash flow was once again solidly positive.

Here are some highlights in support of this performance, well construction, sustained growth sequentially, and in North America, outpaced US land rig count demonstrating enhanced market participation in the recovery. Reservoir Performance grew, when adjusted for the OneStim divestiture. Digital & Integration delivered another strong quarter with resilient margins on track for our full year target. In North America, execution of our returns-focused strategy drove strong margin expansion fully aligned with our double-digit margin targets. And in international markets, despite severe seasonality and relative exposure in Russia and China, we continued growth across geographies.

In this environment, as the industry prepares for an upcycle, performance matters, and decisions on contract awards and capacity allocation are increasingly driven by technology and execution. We were very pleased with the outcome of several international multi-year contract awards, specifically in Middle East and in offshore, building a pipeline that will support growth in 2022 and beyond.

We are determined to drive performance differentiation leveraging our fit-for-basin technology and digital capabilities. This combination benefited our integration performance, with our largest LSTK operations, achieving a 6% improvement in drilling efficiency during the quarter.

This strong start to the year, characterized by resilient revenue, sequential margin expansion, and positive free cash flow, positions us very well, to meet our full year financial ambitions and to deleverage our balance sheet. I want to congratulate the entire Schlumberger team, who delivered strong execution for our customers, having positioned us for the growth that is now underway.

Next, I would like to comment on three elements of our performance strategy that present further opportunities for growth in this upcoming cycle and beyond, Digital, Sustainability, and Schlumberger New Energy. Starting with Digital, 18 months ago, we stated our ambition to lead the digital transformation in our industry and to significantly grow new digital revenue streams. I want today to update you with our progress.

Our digital strategy is a platform strategy, leveraging unique and open platforms DELFI, OSDU and Agora. Since launching our core DELFI platform, we have significantly expanded its market reach from Google Cloud, to Microsoft Azure, and more recently, using IBM Red Hat technology to enable hybrid cloud and offer fit-for-basin cloud solutions as highlighted this morning in our collaboration with Yandex.

We will continue to execute on this platform journey, to expand the choices for our customers and to support our three digital business streams, workflow, data, and operations. First, we offer our customers the opportunity to transition their technical workflows, from the desktop to the cloud, to realize the productivity gains from DELFI workflow integration, collaboration, and access to scalable cloud computing.

Our market leadership on the desktop position us very well to capture this market. In the last 18 months, our customers have increasingly transitioned to the cloud, resulting in 50% growth of our contract backlog and a tenfold increase in full time DELFI users. As we expand our cloud-native applications and enable additional workflows within DELFI, we expect increased adoption across our customer base, resulting in steady growth of our digital workflow revenue.

Second, recognizing that data is the key to unlock the industry digital transformation, we worked with the industry OSDU Forum to open source and contribute the underlying DELFI data ecosystem, helping to establish OSDU as the industry standard, an essential step to liberate data at scale for AI applications and to enable multivendor interoperable workflows. In this context, we recently partnered with Microsoft to offer Azure customers access to our OSDU enterprise data management solution. We will augment this offering with additional AI capabilities and will also expand our geographical reach. The market potential for this data business stream is very significant, as it underpins every customer digital transformation as exemplified by our recent announcement with Equinor.

Third, our customers’ operations represent a unique opportunity to realize the promise of asset and field digital solutions. We designed an open IoT platform Agora to enable edge applications, complementing our DELFI platform operational workflows and integrating with our partner, Sensia. Using Agora and DELFI, we are deploying digital operation solutions for drilling and production both with our customers and as part of our integrated projects. This digital offering can significantly impact our own operations, as was demonstrated this quarter in the Ecuador project and in our main LSTK operations, and also greatly benefit our customers. Our ambition is to establish critical market share in this white space and accelerate collaboration with industry partners to further its adoption.

These three digital business streams, workflow, data, and operations built on open platforms, are supporting our digital growth ambition. We are very pleased with the progress on our platform foundations, with the adoption by a broad set of customers, and are confident in the success of each business stream as we execute our roadmaps.

Moving now to sustainability, we are strengthening our commitment to action, particularly as the industry faces a decarbonization mandate and world leaders have reaffirmed commitments or advanced stronger goals in recent days. As it relates to climate action, this goes beyond reducing our own greenhouse gas emissions, as we believe there is a significant opportunity for our technology and operating practices to decisively impact and accelerate the industry’s decarbonization efforts, as well as contribute toward emission reduction goals around the world.

Our technology portfolio includes solutions that help our customers eliminate flaring, reduce fugitive methane emissions, and leverage automation and digital surveillance to reduce environmental impact. This technology focus on low-carbon impact will be an increasing element of differentiation for Schlumberger in the future.

An example that resonates with our customers is the complete electrification of offshore production systems, as outlined in our earnings release with the bp project for subsea electrification. This is the next offshore frontier, and it will also pave the way to full digital enablement.

Beyond our industry, our CCS partnership with LafargeHolcim and the bioenergy CCS project in Mendota, California are examples of cross-sectors initiatives aligned with climate actions. Specifically, in Schlumberger New Energy, we reached milestones in the sectors where we are participating across the energy transition, hydrogen, lithium, CCS, geothermal, and geo-energy. During the quarter, we established and accelerated new ventures, formed strategic partnerships, and gained market exposure, and are progressing in de-risking technology for upscaling.

We will continue to build out the New Energy portfolio throughout the year, and we will keep you updated on our progress. We are extremely proud of the tangible results we have realized in only a short time, as it clearly outlines the power of the Schlumberger brand and the potential of this new chapter for the future of the Company.

Turning to the outlook. Upward revisions in global economic growth forecasts by the IMF and positive demand forecast adjustments by both IEA and OPEC reinforce the transition into a demand-led recovery, which will strengthen through the second half of 2021 absent new setbacks on vaccination rollouts or easing of lockdowns.

Against this backdrop, we are increasingly confident in our full year activity outlook. In North America, in the second quarter we see sustained activity growth in US land and the seasonal rebound of North America offshore being partially offset by the Canada breakup. As our first-quarter results have shown, particularly in Well Construction, our new mix and sizeable exposure in the North America market will increasingly contribute to our results.

Moving to international markets, activity growth will broaden in the second quarter, with the seasonal recovery in Russia and China augmenting the continued growth in Africa and the Middle East, while Latin America should remain resilient. In addition, the offshore recovery will continue in the second quarter, including the gradual return of exploration and appraisal in key international markets.

The depth and diversity of our international franchise gives us great exposure to this market expansion, especially in Well Construction and Reservoir Performance, which will lead in the second quarter. More broadly, we anticipate all Divisions to grow sequentially at different pace, and margins expansion to be led again by Reservoir Performance and Well Construction. In light of this, directionally, we expect total second quarter revenue to grow in mid-single digits, and our operating margins to further expand by 50 basis points to 100 basis points.

Looking further into the second half of 2021, in North America, the pace of growth is expected to moderate on budget exhaustion and seasonal effects but could surprise to the upside, resulting in full year growth, when excluding the impact of divestitures. In the international markets, our confidence in the second half outlook has been strengthening, based on the latest international rig count trends, capex signals, and customer engagements. International activity will broaden and accelerate in the second half, impacting short to long cycle both on land and offshore, including deepwater activity in the most advantaged offshore basins.

The magnitude of these leading indicators, combined with upward revisions to global economic growth and demand recovery, present the potential for an even stronger inflection than initially anticipated for the second half of the year. Therefore, we have greater confidence in the previous guidance of a double-digit increase in international revenue in the second half when compared to the same period last year and, absent of a setback in post-pandemic recovery, we foresee an upside for full year growth internationally, resulting in a stronger footing as we enter 2022.

In the context of this top line growth and the steps we took to reset the earnings power, we are confident that we will fully realize our operating leverage to deliver our full year ambition of 250 bps to 300 bps margin expansion year-over-year. We expect to continue expanding during — margins during the recovery to support increasing cash flow throughout the year, which will provide subsequent deleveraging opportunities.

Now, I would like to pass the call to Stephane.

Stephane Biguet — Executive Vice President and Chief Financial Officer

Thank you, Olivier and good morning, ladies and gentlemen. First quarter earnings per share was $0.21. There were no charges or credits recorded during the first quarter of 2021. Excluding the charges and credits recorded in the previous periods, this represents a decrease of $0.01 sequentially and $0.04 when compared to the first quarter of last year.

Overall, our first quarter revenue of $5.2 billion decreased approximately 6% sequentially. However, if we adjust for the OneStim and artificial lift low-flow divestitures, which were completed during the fourth quarter of last year, revenue was essentially flat sequentially despite the first quarter seasonality. Excluding the impact of divestitures, North America revenue increased 10% sequentially, reflecting a significant activity increase on land, partially offset by lower product sales offshore.

International revenue declined only 3% sequentially despite the effects of the extended winter period we experienced in Russia and the usual seasonality in the Far East. Pre-tax operating margins were 12.7% and have now increased for three quarters in a row. In addition, pre-tax operating margins were 230 basis points higher compared to the same quarter of last year. This represents the highest margin since the third quarter of 2019. This strong margin performance reflects the significant operating leverage we have created through the combination of the high-grading of our portfolio and our cost-out program, which is now essentially complete.

Company-wide adjusted EBITDA margins of 20.1% for the first quarter were flat sequentially as the positive impact of the OneStim divestiture was offset by the seasonal effects we typically experienced in the first quarter. EBITDA margins were 203 basis points higher compared to the same quarter of last year.

Let me now go through the first quarter results for each Dvision. First quarter Digital & Integration revenue of $773 million decreased 7% sequentially driven by seasonally lower sales of digital solutions and multiclient licenses. Margins only decreased by 37 basis points to 32% as the effects of the digital solutions and multiclient revenue declines were largely offset by improved profitability from APS projects. Reservoir Performance revenue of $1 billion decreased 20% sequentially. However, excluding the impact of the divested OneStim business, revenue increased 3%, despite seasonally lower revenue in Russia and China. The revenue growth was driven primarily by higher activity in Latin America and the Middle East.

Margins increased 260 basis points to 10.2% largely due to the divestiture of the OneStim business that was dilutive to the Division’s fourth quarter margins. Well Construction revenue of $1.9 billion increased 4% sequentially and margins increased 103 basis points to 10.8% due to increased activity in North America land and Latin America. This growth was partially offset by the seasonal slowdown in drilling activity in Russia and China.

Production Systems revenue of $1.6 billion decreased 4% sequentially. International revenue declined 4% while North America was down 3%. Despite the revenue decline, margins only decreased 71 basis points to 8.7% as a result of cost measures as well as improved profitability in midstream production systems due to higher activity.

Now, turning to our liquidity. During the quarter, we generated $429 million of cash flow from operations and positive free cash flow of $159 million, despite severance payments of $112 million and the increase in working capital requirements we always experienced in the first quarter due to the annual payout of employee incentives. Our cash flow will improve throughout the rest of the year, consistent with our historical quarterly trends.

Our net debt at the end of the first quarter was $13.7 billion, a decrease of $207 million when compared to the end of the previous quarter. During the quarter, we made capital investments of $270 million. This amount includes capex, investments in APS projects and multiclient. For the full year 2021, we are still expecting to spend between $1.5 billion to $1.7 billion on capital investments.

On that note, let me take the opportunity to provide you with a quick update on our capital stewardship program. Optimizing the allocation of our capital investments will be critical to maximize the benefits of the ongoing activity recovery, which is poised to accelerate in the next few quarters. As part of the Company’s reorganization, we implemented a new capital allocation framework that governs all types of investments. The underlying principle behind the framework is that investment opportunities are prioritized based on returns and cash flow before any other metric.

At the corporate level, this framework allows us to critically assess our technology portfolio and rationalize our offering to reduce capital intensity and maximize returns. At the Division level, we have strengthened our processes to ensure that new assets, as well as existing assets are deployed where they will generate the highest returns. We are also leveraging this capital discipline to drive commercial behaviors and improve the quality of our revenue.

With this in place, we remain confident in our ability to achieve double-digit cash flow margin — free cash flow margin for the full year of 2021, and beyond. This will allow us to deleverage the balance sheet, which remains a top priority for us. It was worth noting that during the quarter, the two major credit rating agencies confirmed our long-term credit ratings of A2 and A, respectively. Both cited our expected strong cash flow profile and our commitment to deleveraging.

I will now turn the conference call back to Olivier.

Olivier Le Peuch — Chief Executive Officer

Thank you, Stephane. So I believe that we are ready to open the floor for the Q&A session.

Questions and Answers:

Operator

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

James West — Evercore ISI — Analyst

Hey, good morning, Olivier and Stephane.

Olivier Le Peuch — Chief Executive Officer

Good morning, James.

James West — Evercore ISI — Analyst

So, Olivier, great to hear your increased conviction about international top line growth in the second half of this year. I’d love to hear or understand how you’re thinking about the slope or shape of that recovery, and then really, as it relates more so to ’22 and ’23, which I think will be very important years.

Olivier Le Peuch — Chief Executive Officer

No, thank you, James. I think, first, I think I believe it’s clear that we are about to enter demand-led recovery. And I think the macro factor, both economic growth and what we are seeing indicates that the demand recovery will reach 2019 level by or before the end of 2022. In this context, I believe that we are ready and starting at and during the second half of this year, facing the beginning of demand-led recovery that will trigger multi-year recovery cycle and industry upcycle. In this context, if you look at the recent pair of investments, look at the social constraints in North America due to capital discipline, I believe that this will create the connection to create a significant pull on international supply.

So, this will support international supply activity buildup, not only at the end of this year, but well into ’22 and ’23. In addition to this, I believe that the offshore, and being a unique market, it’s a privileged market for IOCs, some NOCs, and focusing the balance we’ll also see a gradual but very strong recovery over the long-term. It is the offshore advantage basins represents an extremely good oil production plateau for some basis at low carbon footprint. So this will support also the long-term international recovery. So, we believe — we believe really that we are very well-positioned to outperform in this macro, because we believe that this macro outlook, that would include a growing international mix, including offshore will play very well to our strengths.

In addition, we have accelerated our strategy transformation, both the organizational transformation and key strategic elements that will place very well from efficiency performance focus from our capital stewardship, our fit for basin that is resonating very well for our customer, and finally, for our digital and decarbonization strategic focus we have put in. So, I believe that we are seeing the beginning of this multi-year growth. We are also seeing that our performance strategy is resonating very well for our customer. And we have been awarded several [Indecipherable] that are creating the backlog we need to support this growth going forward. So yes, I’m optimistic, not only on the second half of this year, but on an accelerated path in 2022, and a long-cycle strength, including offshore, in ’22, ’23 and beyond.

James West — Evercore ISI — Analyst

No, that was very clear, Olivier. Thanks for that. Maybe the second, the follow-up for me is on the margins. You’ve had good margin progression in the last three quarters. How do you think about sustainable margin progression and expansion as the recovery takes hold?

Olivier Le Peuch — Chief Executive Officer

I think going forward, James, as we enter this industry upcycle, I believe there are three elements that will favorably impact our margin expansion. First, I think is the — as I described, is the very favorable macro outlook, that combined with the pace of international growth, the offshore elements, and also, as we are starting to see this quarter, the return of exploration and pressure activity that is still needed to replenish the reserve. And also, that is becoming more near-field exploration, close to the offshore hubs in particular. So, these factors are very favorable.

Secondly, I believe that we have created quality revenue initiatives as part of our initiative. First, fit for basin. Fit for basin technology is creating the premium that differentiate us in some critical basin, in some critical assets, and give us the premium for revenue quality improvement. Similarly, I think our technology access, as we have seen in North America has played great role in helping us to expand market, but also to command premium with our technology partner. And finally, the success of Digital will be accretive over the period to this. So the further and I think beyond this strategy, I think is the step change we expect to materialize into our integration contracts, from a performance efficiency using Digital as we have demonstrated already, using FIT [Phonetic] technology and using practice that becoming best-in-class.

So, believe that these three elements, the backdrop, the key element of our strategy for revenue quality, and the enhanced margin on our integrated contract will all combine to create a condition for further margin expansion, and acceleration of our margin expansion going forward.

James West — Evercore ISI — Analyst

Excellent, thanks, Olivier.

Operator

And our next question is from David Anderson with Barclays Capital. Please go ahead.

David Anderson — Barclays Capital — Analyst

Hi, good morning, Olivier. Just want to follow-up on…

Olivier Le Peuch — Chief Executive Officer

Good morning, Dave.

David Anderson — Barclays Capital — Analyst

…the discussion around the Middle East. You talk about robust growth in Saudi and Qatar this quarter. Really seems to be kind of first tangible signs of international first. I was just wondering if you could talk a little bit about that performance during the quarter, and whether or not those were new contracts starting up or existing contracts starting — coming back on. But more importantly, I was wondering if you could just talk about the types of tenders that are being discussed in the Middle East? And do you see projects that would be expanding capacity in the region? And also, do you think this will be more project management work, I think you had talked about LSTK kind of doing a little bit better this quarter. Do you think that’s going to be a bigger part of the mix going forward?

Olivier Le Peuch — Chief Executive Officer

I think, first, to comment on our growth in Middle East. Indeed, we had sequential growth in Middle East during the quarter. And I think this was led by, indeed, Saudi and Qatar to a large extent. And these were due to two factors, Qatar market position combined with the activity growth have resulted into interactivity. In Saudi, I think it’s more related to performance, and activity share awards that presented from our performance in execution in the quarter. And I think we see these factor of strong market position we have of performance differentiation to help us go forward. So that’s to maybe support and substantiate what we see going forward. In addition to this, as we have seen from last quarter to this quarter, we did announce some critical awards that are securing or expanding this market position in Middle East.

Now, there is a lot of elastic air, some of our peers have talked about large and very larger compact tenders underway. So, I cannot and will not comment on this as this tender is underway, but what can I say is that the activities rebounding, the activity outlook both land and offshore Middle East will be strengthening. So, our customer are indeed securing capacity and looking for best performer and looking for in the sense, the condition that would make them successful in their ambition to augment their capacity and augment the pollution going forward. So, it will be performance that will matter most in the future for me, that is my opinion.

David Anderson — Barclays Capital — Analyst

Makes sense. My other question is on the digital side. You made a lot of progress over the last year, establishing a footprint with your — with the platform with DELFI across a lot of IOCs and NOCs, I believe Chevron is actually even implementing across the Permian. So, it feels like you’re kind of where you want to be in terms of your footprint. It was interesting to hear you talk about the three elements of the workflow, data and operations. So, I’m just wondering if you could just maybe expand a bit on how you see each, the pace of growth in each of those. And what does that dependent upon? Partly I’m wondering is it, customers as getting more comfortable in using digital and day-to-day operations, but do you also need to build out new software applications or maybe it’s just something else?

Olivier Le Peuch — Chief Executive Officer

No, first I think it’s clear that we need to recognize the industry as it has gone out of this causes and turn into a new landscape as realize that digital is a tenant of the future. And digital is here to impact efficiency performance, and to make this industry more of as you down for their own term. So first that has been a catalyst in the last 18 months that accelerate the adoption of digital that’s the first. We believe that our platform strategy is being recognized, accepted, and across different customer type from national company to independent, to the IOCs. As we have seen, there is a large adoption of this, because we have kept this platform open.

Now, when it comes to the pace and growth factor that differentiates workflow, data and operation, I believe that workflow is the one that is the most mature, because it builds on our existing desktop market leadership we have, and here we are transitioning the existing customer base we have towards to cloud. And each of them is realizing the power of the cloud from productivity, from collaboration, from access to scalable cloud computing. We simply need to reassure them that our platform is open and that they can make the choice their choice on the cloud infrastructure, which we are doing.

The second data I think is renaissance of the data market that used to be a major market in digital 20 years ago. Everybody realized that without the data, we cannot unlock the power of digital transformation. So thankfully the industry has come together and has created its OSDU platform, opens up so fast that the universe driven by the open form. And we have been fortunate to technically contribute of their vehicle system to this. So in that foundation, every company will have to roll outs and we’ll set a huge opportunity to hold out OSDU as a platform so that it unlock the data access, liberate the data and then data provider, and then service provider consulting company, and the customer themselves will tap into these data using AI application. And this is where we want to participate, both the data transition to this new platform and the AI opportunity upon this, family or probation. Probation study the biggest prize long-term, but also the most difficult to realize because every asset, every infrastructure on the feed, every infrastructure of the age is different.

So while we believe that there is immense opportunity to use digital in operation, and we are doing it very successfully, internally, the complexity, the system integration needs and the fit for purpose digital deployment will slow down. The adoption of this yet we’ll make progress and we’ll continue to partner with other company to make sure that we offer integrated offering to the industry. When you combine these three at the different space of growth, you create the condition for multiplicity of revenue stream that we support double digital ambition that we realized within the decade.

David Anderson — Barclays Capital — Analyst

Thanks for the information. Thank you.

Olivier Le Peuch — Chief Executive Officer

Thank you.

Operator

Our next question is from Chase Mulvehill with Bank of America Merrill Lynch. Please go ahead.

Chase Mulvehill — Bank of America — Analyst

Hey, good morning, everybody. I guess first thing I wanted to hit on was kind of new energy, so I don’t know if maybe at a high level, could you take a minute and talk to how Schlumberger is doing, the new energy environment and what are the key highlights of your new energy transition strategy? And it actually would be great if you could lay out the perspective roadmap as Schlumberger embarks on this new energy transition journey?

Olivier Le Peuch — Chief Executive Officer

Yeah, great question, Chase. I think as you have seen, we’ve decided to enter a new chapter for the Company and the way we decided to go after this is to first identify and selectively the domain in which we believe we can leverage our strengths. The phase delivers our strengths, our technology, and global footprint to create and force partnership technology acquisition, or organically grow the domain. So first we have decided to explore and establish market position and diversify our market entrance into this domain. So, you have seen that we have in parallel from lithium to CCA, from hydrogen to geo energy and geothermal credit adventure, each of them with potentially a different partner for addressing different industry sector, so that we diversify not only our approach, but diversify and expand our market reach. So that has been the first is to make sure that we diversify our investments, diversify our market approach and our type of partnership. So that has been our first we say a framework that we have used to develop this.

Now, what is ambition, their ambition is to create the future of the Company in the long run. So within the decade and within the next two or three years specifically, with the risk at scale. This technology investment, this venture investment, working with our partners, working internally to develop those technology as we are for green hydrogen as well with our CCS Mendota bioenergy plant or with [Indecipherable] for CCS and cement plant will really work, develop, embarking to venture where we — the risk enhance and then when it is the risk at scale, we’ll then make bigger investments, large investments that will then support the long term growth.

Chase Mulvehill — Bank of America — Analyst

Perfect. And there is a quick follow up to James first question around international, you mentioned that 2019 — so next year, we can kind of get back to 2019 levels. So I guess my question would be 2019 was pretty tight and you were starting to see some pricing. So if we get back to 2019 levels next year, like what could this mean for pricing? And when we think about the full international cycle, could we actually see a real pricing cycle unfold internationally as the recovery gains momentum?

Olivier Le Peuch — Chief Executive Officer

First, I think our push to do this is first and foremost performance. We believe that performance creates the revenue opportunity, the revenue quality and the margin expansions we believe that are the foundation of our strategy. So, now whether the market capacity in some basin for some specific business line we create the condition for pricing. I believe it will. But again, you will depend on how do we differentiate for performance?

How do we make sure that our technology is unique and ease in high-demand and credit condition for the customer to accept to a premium on this technology and that’s our approach? Now what are the global capacity will create in a short-term global pricing, I don’t think it will, but I think it will set any new coming quarters, create pricing inflection on some business line in some basin, we are already seeing it today in North America for very specific well construction technology that is in high demand and the amount of premium.

Chase Mulvehill — Bank of America — Analyst

Okay, perfect. Appreciate the color, Olivier. I’ll turn it back.

Olivier Le Peuch — Chief Executive Officer

Thank you.

Operator

And next we go to the line of Scott Gruber with Citigroup. Please go ahead.

Scott Gruber — Citigroup — Analyst

Yes, hello.

Olivier Le Peuch — Chief Executive Officer

Good morning, Scott.

Scott Gruber — Citigroup — Analyst

Good morning. So the D&I margin at 32%, super impressive. How should we think about incrementals for that segment over the course of the year by definition, they obviously need to be healthy given the starting point, but what’s a reasonable range and relatedly, and as you get deeper into these digital management contracts with customers, obviously profitability improves over time. Would that be a material driver during the rest of the year, or is that incremental margin benefit more in ’22 and beyond?

Olivier Le Peuch — Chief Executive Officer

No, I think first — I think we provided a guidance for full year margin at 30%. And I think you have seen that the way we started the year is putting us on an exam footing to realize that margin outlook, and its margin comes from two major factors. One is the performance of our integration contract, and secondly, the strength and margin of our digital business. Now, going forward, and holding into the later part of the year obviously, the digital will gradually start to improve its size and we’ll create and generate the full through the debrief.

We support this 30% ambition and quit as we exit 2021 clearly our performance put us on a better and an opportunity for margin expansion into 2022. So over time long-term the digital will indeed grow and we share the ambition there and we’ll clearly help continue to support these impressive margins and possibly expand it further in the long term.

Scott Gruber — Citigroup — Analyst

Got you. And just shifting gears a little bit and maybe somewhat premature to ask, but it just given that the international recovery outlook is strengthening and obviously the capital intensity to your portfolio is now on the decline. How do you think about the use of free cash flow? Is the focus purely on building cash and deleveraging, what conditions would you look forward to start enhancing the cash return and as we move deeper into the recovery, is there a preference for dividend enhancement versus buy backs, whether the time is right to return cash?

Stephane Biguet — Executive Vice President and Chief Financial Officer

So, I’ll answer that question, Scott. Yes, you said that our immediate priorities is indeed to the leverage the balance sheet. At the same time, we want to make sure that we can sustain growth in our core business. Of course, even work Epic’s intensity has reduced quite a bit compared to the past, but we also need to leave enough capacity to execute our strategy, particularly as it relates to new horizons of growth. So, in any case, we’re very, it relates to our core business or white spaces as I mentioned during the prepared remarks, any new investment will be looked at under the strict lines of our return base capital allocation framework. And beyond that, yes, once we are filtered under this project, we will return any excess cash to our shareholders for either dividends or stock repurchases.

We do not have a prescribed split between the two. It will depend on the conditions at that time. The time we have to make the decision and in particular, the sustainability of cash flows.

Scott Gruber — Citigroup — Analyst

Got it. Appreciate it.

Operator

And our next question is from Sean Meakim with J.P. Morgan. Please go ahead.

Sean Meakim — J.P. Morgan — Analyst

Thanks. Good morning.

Olivier Le Peuch — Chief Executive Officer

Good morning, Sean.

Sean Meakim — J.P. Morgan — Analyst

I appreciate the commentary on the outlook for the Middle East. Maybe just to follow-up, can we talk about the legacy margin dilutive LSTK contracts? Just to what extent have you been able to mitigate some of the challenges there? They’re now a few years old. I was just curious to what extent does a contract role create an opportunity for resetting the margin impact for those contracts maybe in the medium term?

Olivier Le Peuch — Chief Executive Officer

Yeah, I think as you know for the last two years, I think we have been increasing our focus management and operational focused on resolving or improving this highly dilutive compact that there were two or three years ago. And I think we have made great progress. I think what are they are exactly where I would like them to be, and attracted to the open margin, maybe not, but I think we have made progress in three directions, first, in engaging for customer and making them realize the complexity and providing the support to execute this contract with better support and eliminating or mitigating some risk.

Secondly, by adopting an accelerating adoption within this compact of fit-for-basin technology that is unique, and that we create for the long run an opportunity to set benchmark on those complex hence to keep our market position and enhance our future execution. And finally, we have in the last few quarters, last few months actually signed to hold out our digital operation capability to extract further automation, further efficiency on this.

So we have improve enhance customer collaboration on those contracts, we have created the technology portfolio that is starting to mitigate and enhance the operation execution. And we have rolled out unique digital features that are creating. So those conditions are unique, customer recognize it, and I think has altogether [Indecipherable] this contract and expense review, look for making sure the commercial terms and the revenue quality will explode in the future will be more negative than they’re today.

Sean Meakim — J.P. Morgan — Analyst

Thanks, Olivier. That’s very helpful. It’s encouraging as well. So just to come back maybe to cash flow north of $2 billion of free cash looks to be the bar here for full year just given the 10% margin target. Could you just maybe highlight any major levers that would materially deviate from that goal? And then I’m also just thinking beyond cash flow? Are there plans for potential further pruning of the portfolio to optimize for basin maybe help accelerate de-levering of the balance sheet?

Stephane Biguet — Executive Vice President and Chief Financial Officer

So look, Sean I don’t think there’s anything that’s going to deviate from us achieving double-digit, i.e. possibly more than 10% free cash flow is here a very typical seasonality in the working cap and free cash flow throughout the year also, free cash flow will improve quarter-after-quarter like it has in the past and we’ll deliver on that ambition. It can be enhanced by exceptional proceeds. We’re continuously looking at our portfolio as I mentioned earlier, we’re particularly working on two key divestitures. One is I mentioned in the previous quarter that in regards to our APS portfolio, we’re looking at launching very soon in the next few days actually a formal process for the APS assets in Canada, there’s a lot of interest still and the economics have improved quite a bit.

So we’re quite hopeful there to close a good transaction and the second one is the rigs we have in the Middle East, we’re actually even more advanced there, we’re in the formal process, we have short listed a few interested buyers and they’re just concluding the due diligence. So we should be closing or at least signing sorry this transaction in the next few months. So this will enhance the cash flow profile and the potential reduction and overall net debt and the flexibility to give them a liquidity.

Sean Meakim — J.P. Morgan — Analyst

Very helpful. Thanks to you both.

Stephane Biguet — Executive Vice President and Chief Financial Officer

Thank you.

Operator

Next we go to Connor Lynagh with Morgan Stanley. Please go ahead.

Connor Lynagh — Morgan Stanley — Analyst

Thanks, good morning.

Olivier Le Peuch — Chief Executive Officer

Good morning, Connor.

Connor Lynagh — Morgan Stanley — Analyst

I think we had noticed that you guys were a bit more upbeat on the offshore side of things. And basically, I’m wondering if you could frame how you think that markets going to trend relative to last cycle? And in particular, how do you think customers are thinking about exploration activity?

Olivier Le Peuch — Chief Executive Officer

That’s a great question. I think first, it’s worth saying that the offshore basins and the most advantage offshore basins are still very much, very critical resource and core resource for some of our customers, I’ll seize some unique NOCs and the few independent that are pure play offshore independent medium to large size. So first these resource are precious, this resource typically have a good geology. And as I said, both from the pollution plateau, they provide and the low carbon opportunity they have in term of mix or API grade, I think these are excellent resources. The second thing I believe is that the economics for offshore due to integration success, fit technology and digital parties have improved from the last cycle. And I think opportunity exists for industry to leverage this and accelerate some FID going forward.

So, another factor that is very critical as you touch the expression appraisal is that most of the major and large NOC on this — in this context organizing the impact of exploiting hubs, offshore hubs and the offshore hubs, the opportunities is to exploit those hubs to improve the return on asset, improve return on infrastructure and focus on near field or backyard exploration, so that they maximize the return on existing infrastructure, existing FPSO existing platform. So, that it is also something that plays very well in our portfolio for configuring or for subsidy back as we are expanding this domain.

So, I believe that the expression appraisal will not necessarily accelerating frontier exploration, but will accelerate the near field exploration offshore are seeing stunning to see this quarter and would accelerate during the second half of the year. So I’m optimistic indeed on offshore and if you read some of the high stats or IHS reports or some of the reports, highlighting the FID pipeline, and you see that FID pipeline that are already pre committed towards ’20 to ’23 of the potential over ’22, ’23 and beyond to eclipse the last 2017, 2019 in terms of number of projects, but also in terms of total capex invested in deepwater.

Connor Lynagh — Morgan Stanley — Analyst

Got it. It’s helpful. And maybe just sticking with the offshore theme, could you help us think through on the production systems, I think you called out you expected all divisions to grow sequentially, but how should we think through the long cycle portion of that business particularly the subsea business?

Olivier Le Peuch — Chief Executive Officer

Yeah, I think first the production system I think is not only subsidy portion system as both short and long cycle as exposure in short cycle in North America to the ESB which is coming back strongly and the common surface equipment also servicing the FAC and our partner Liberty and also internationally is indeed a mix of short for ESB and some commercial equipment and long cycle for midstream as well as for subsea and surface equipment.

So, it’s a mix of long and short with very, very tangible exposure in North America benefiting short-term and long-term international long cycle both recovery and pollution new product. In that context and back to the point on offshore, I believe that the subsea market is very alive, and I think last year the number of subsidiaries were so short of 200 compared to higher than 250 in 2019. The prediction this year is to be above 200, 220 these are our prediction and that’s align with the market prediction and this will be more or less increasing going forward gradually to be within between 250 to 300 over the mid-term period to support this offshore project.

Connor Lynagh — Morgan Stanley — Analyst

Appreciate the color. Thank you.

Olivier Le Peuch — Chief Executive Officer

Thank you, Connor.

Operator

And our next question is from Marc Bianchi with Cowen & Company. Please go ahead.

Marc Bianchi — Cowen and Company — Analyst

Thank you. The guidance for second quarter for the mid-single-digit revenue and $50 million to $100 million of margin improvement seems to suggest a little bit maybe weaker margin progression than I would have otherwise expected and certainly if I look at the operating leverage of the business that’s had over the past few quarters. It would seem that there’s a little bit less operating leverage implied in second quarter. So, I’m curious, are there some unusual costs that you’re realizing perhaps their startup costs for some of these contracts you mentioned? Any color around that and how maybe that could progress beyond second quarter would be helpful.

Olivier Le Peuch — Chief Executive Officer

Yes, Marc, thank you for the question. So indeed, our [Indecipherable] for operating margin expansion between 50 and 100 bps into the mid single-digit would still imply on the — I hand of that on that range 30 plus in Chemical. So, I believe that this is the first remark. The second is that we are still on pack. Okay and very confident on our 250 bps to 200 bps full year margin expansion. So, in the second quarter, indeed, there are two factors. One is the fact that you’re mobilizing for what the offshore return and some of the activity that are prepping and mobilizing for the second half already in the later part of the call.

But also there are some persistent but temporary could be tolerated constraints and costs that as the lockdown seen place in many countries that adding costs upfront, introduce mobilization and making this mobilization cost maybe a little bit more than they will have been in over second in the past. So these are the factors that are shaping up. But we’re very confident that the margin expansion is in place and we continue going forward.

Marc Bianchi — Cowen and Company — Analyst

Wonderful, thank you for that. And then you mentioned in your prepared remarks and then in also in the press release about the kind of double-digit growth for the second half in international setting up for kind of upside to already robust growth anticipated for ’22. I’m curious what the baseline is for that comment. Are you referring to a market forecast that’s out there? Are you referring to sell side consensus, just curious what the benchmark we should be thinking about this?

Olivier Le Peuch — Chief Executive Officer

No, it’s a combination of factors. As I said, I think there are some market indicators from the capex of some of the NOC national company, there is rig counts projection that we’re making based on engagement with customer and with rig contractor. And there are some markets position or market enhancements and contract awarded, we have been benefiting in the last few quarters. So the mix of our market position, favorable mix, the market expansion on international for that has minimal seasonal effect as well as re-investments. And the natural company, increasing the investment in second half, all combined to make us more confident in where three months ago on the shape and inflection of this recovery in the second half.

Marc Bianchi — Cowen and Company — Analyst

Got it. Thanks, Olivier.

Olivier Le Peuch — Chief Executive Officer

Thank you very much. Last question…

Operator

Ladies and gentlemen, I’ll turn you back to Schlumberger for closing remarks.

Olivier Le Peuch — Chief Executive Officer

Okay, thank you very much. So, thank you. And to conclude, I’d like to offer three takeaways. First, the macro economic and activity outlook are increasingly supporting an attractive industry cycle, characterized with an inflection in international activity, a consolidation of short-cycle activity, and the return advantage of shale plays, all playing to our core strength. In particular, we’re increasingly optimistic about the international growth trajectory during the second half of the year, which absent of a setback in pandemic recovery, will result in full year international growth. As a consequence, we have reinforced our confidence in our 2021 financial targets on margin expansion and free cash flow generation.

Second, we’re convinced that our performance strategy is aligned with a new industry landscape, and is increasingly resonating for customer as performance matters critically in this environment. This is translating into market wins, an offshore basins, and we see both our ambition to outperform through this cycle. In addition, the steady progress in our digital strategy will translate over time in expanding new revenue streams and attractive margins.

Third, the margin expansion realized this quarter both sequentially, and year-on-year is reflecting the impact of both our capital strategy and the restructuring power and will translate into substantial operating leverage as the year progress and activities strengthens in all basins. We anticipate the upcoming quarters to further this margin expansion with both contribution from our basin, and divisions. Finally, our commitment towards both sustainability and new energy is materializing in a growing portfolio of technology and ventures that will contribute to the global climate actions and to the future of the Company. Ladies and gentlemen, this year represents a unique opportunity for the new energy to execute on its new performance journey and outperform the market within an increasingly attractive outlook. Thank you very much.

Operator

[Operator Closing Remarks]