Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
First Quarter 2023 Compared to Fourth Quarter 2022
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(Stated in millions) |
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First Quarter 2023 |
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|
Fourth Quarter 2022 |
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Income Before |
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Income Before |
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Revenue |
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Taxes |
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|
Revenue |
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|
Taxes |
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Digital & Integration |
$ |
894 |
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|
$ |
265 |
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$ |
1,012 |
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|
$ |
382 |
|
Reservoir Performance |
|
1,503 |
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|
242 |
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1,554 |
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|
282 |
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Well Construction |
|
3,261 |
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|
|
672 |
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3,229 |
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|
|
679 |
|
Production Systems |
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2,207 |
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|
205 |
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2,215 |
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|
238 |
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Eliminations & other |
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(129 |
) |
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7 |
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(131 |
) |
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(24 |
) |
Pretax segment operating income |
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1,391 |
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1,557 |
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Corporate & other (1) |
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(169 |
) |
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(169 |
) |
Interest income (2) |
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17 |
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14 |
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Interest expense (3) |
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(114 |
) |
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(118 |
) |
Charges and credits (4) |
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36 |
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63 |
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$ |
7,736 |
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$ |
1,161 |
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$ |
7,879 |
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$ |
1,347 |
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(1)Comprised principally of certain corporate expenses not allocated to the segments, stock-based compensation costs, amortization expense associated with certain intangible assets, certain centrally managed initiatives and other nonoperating items.
(2)Interest income excludes amounts that are included in the segments’ income ($- million in Q1 2023; $19 million in Q4 2022).
(3)Interest expense excludes amounts that are included in the segments’ income ($3 million in Q1 2023; $3 million in Q4 2022).
(4)Charges and credits are described in detail in Note 2 to the Consolidated Financial Statements.
First-quarter 2023 revenue of $7.7 billion decreased 2% sequentially. Revenue grew 4% in North America, the eighth consecutive quarter of growth, as SLB benefited from its exposure to the most resilient basins and market segments. Internationally, the sequential revenue decline of 3% was less pronounced than historical trends as seasonal effects were partially offset by robust activity gains.
From a macro perspective, SLB maintains its very constructive multiyear outlook as the upcycle attributes and key activity drivers continue to evolve very positively. The international and offshore markets continue to experience a strong resurgence of activity driven by resilient long-cycle development and capacity expansion projects. In contrast, the North American land market, which led the early part of this upcycle, could potentially result in an activity plateau in 2023 due to lower gas prices and capital restraint by private E&P operators.
On balance, SLB believes the global activity outlook for the full year remains very solid. Through the first quarter, the resilience, breadth, and durability of this upcycle have become more evident, particularly in the international markets. These attributes are highlighted by the following factors:
•There is broader recognition of the positive long-term demand outlook for oil and gas and the potential for a stronger demand rebound in the second half of the year. In addition, recent OPEC+ decisions continue to keep commodity prices at supportive levels, providing operators increased confidence to execute their projects.
•Broad-based investments to expand oil capacity and diversify gas supply have been reinforced by the capex plans recently announced by major IOCs and NOCs. Most of the announced budgets highlight a significant increase in spending that supports multiyear activity growth in key resource basins all over the world. In fact, we expect investments will become even more extensive internationally as the pursuit of supply diversity remains a global priority and gathers greater urgency.
•The durability of the current cycle is underscored by the nature of the ongoing investments with the emergence of gas as a long-term energy transition fuel and enabler of energy security, the prominence of long-cycle projects, and the pivot to the Middle East and offshore basins as the anchors of supply growth.
•The return of global exploration and appraisal will likely extend this cycle of investment for a number of years.
Looking to the second quarter of 2023, SLB expects strong growth with seasonal recovery in the Northern Hemisphere, capacity expansion projects in the Middle East that are in various stages of ramp-up, and robust activity in Asia and Sub-Sahara Africa. This growth scenario provides support for broad sequential margin expansion across the Divisions and geographies.
Digital & Integration
Digital & Integration revenue of $894 million declined 12% sequentially due to lower revenue from APS projects and seasonally lower sales of digital and exploration data licenses following strong year-end sales. The APS revenue decline resulted primarily from a temporary production interruption in the projects in Ecuador due to a pipeline disruption and lower commodity prices that impacted the project in Canada.
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Digital & Integration pretax operating margin of 30% decreased eight percentage points due to seasonally lower sales of digital and exploration data licenses and lower APS revenue. Digital & Integration pretax operating margin is expected to expand next quarter on higher digital sales and increased revenue from APS projects.
Reservoir Performance
Reservoir Performance revenue of $1.5 billion decreased 3% sequentially primarily due to seasonal activity reductions in Europe and Asia and lower revenue in Russia.
Reservoir Performance pretax operating margin of 16% decreased 207 basis points (“bps”) largely due to reduced profitability from the seasonal decline in stimulation activity internationally, primarily in the Northern Hemisphere.
Well Construction
Well Construction revenue of $3.3 billion increased 1% sequentially driven by increased drilling, measurements, and integrated well construction activity, mainly on land and offshore North America that was largely offset by lower revenue in Russia.
Well Construction pretax operating margin of 21% was essentially flat sequentially.
Production Systems
Production Systems revenue of $2.2 billion was flat sequentially as strong sales of subsea production systems in offshore North America and Trinidad were offset by lower revenue in the Middle East & Asia and Russia following the strong year-end sales of the previous quarter.
Production Systems pretax operating margin of 9% contracted 148 bps sequentially as improved profitability from increasing activity, coupled with execution efficiency in North America, was more than offset by reduced margins internationally due to seasonality and activity mix.
First Quarter 2023 Compared to First Quarter 2022
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(Stated in millions) |
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First Quarter 2023 |
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First Quarter 2022 |
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Income |
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Income |
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Before |
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Before |
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Revenue |
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Taxes |
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Revenue |
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Taxes |
|
Digital & Integration |
$ |
894 |
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$ |
265 |
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$ |
857 |
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$ |
292 |
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Reservoir Performance |
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1,503 |
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|
242 |
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1,210 |
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|
160 |
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Well Construction |
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3,261 |
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|
|
672 |
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2,398 |
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|
388 |
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Production Systems |
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2,207 |
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|
205 |
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1,604 |
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|
114 |
|
Eliminations & other |
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(129 |
) |
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7 |
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(107 |
) |
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(60 |
) |
Pretax segment operating income |
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1,391 |
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|
894 |
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Corporate & other (1) |
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(169 |
) |
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(164 |
) |
Interest income (2) |
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17 |
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2 |
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Interest expense (3) |
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(114 |
) |
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(120 |
) |
Charges and credits (4) |
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36 |
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26 |
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$ |
7,736 |
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$ |
1,161 |
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$ |
5,962 |
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$ |
638 |
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(1)Comprised principally of certain corporate expenses not allocated to the segments, stock-based compensation costs, amortization expense associated with certain intangible assets, certain centrally managed initiatives and other nonoperating items.
(2)Interest income excludes amounts that are included in the segments’ income ($- million in 2023; $12 million in 2022).
(3)Interest expense excludes amounts that are included in the segments’ income ($3 million in 2023; $3 million in 2022).
(4)Charges and credits are described in detail in Note 2 to the Consolidated Financial Statements.
First-quarter 2023 revenue of $7.7 billion increased 30% year on year. SLB’s Core Divisions, consisting of Reservoir Performance, Well Construction and Production Systems, collectively grew 34% and expanded pretax operating margins by more than 300 bps. Each of these three Core Divisions delivered very strong growth and expanded margins—driven by increased activity, pricing, and technology adoption.
On a geographical basis, year-on-year revenue growth was broad based with North America revenue increasing 32% due to strong land and offshore drilling and higher sales of production systems, while international revenue grew 29%. International growth was widespread across all areas, led by Europe & Africa, which grew 41% primarily from higher sales of production systems in Europe and Scandinavia and increased exploration and production activity offshore Africa. Latin America revenue increased 34% due to robust drilling activity
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and higher sales of production systems, while revenue in the Middle East & Asia increased 18% primarily due to higher drilling, intervention, and evaluation activity.
Digital & Integration
Digital & Integration revenue of $894 million increased 4% year on year as a result of continued growth in digital sales and increased exploration data license sales in the US Gulf of Mexico, which were partially offset by lower revenue from APS projects.
Digital & Integration pretax operating margin of 30% decreased 440 bps year on year as the continued growth in digital sales was more than offset by lower APS revenue.
Reservoir Performance
Reservoir Performance revenue of $1.5 billion grew 24% year on year due to increased activity across all areas on land and offshore and from both exploration and production activity. More than 30% revenue growth was recorded both in Latin America, mainly from higher intervention activity, and in Europe & Africa, largely from new evaluation and stimulation projects.
Reservoir Performance pretax operating margin of 16% expanded 291 bps year on year with profitability improving across the international market driven by higher activity and improved pricing.
Well Construction
Well Construction revenue of $3.3 billion increased 36% year on year driven by strong activity and solid pricing improvements led by North America and Latin America, both of which grew more than 45%. Europe & Africa revenue increased 38% while Middle East & Asia revenue grew 24% year on year.
Well Construction pretax operating margin of 21% expanded 444 bps year on year with profitability improving across most areas driven by higher activity and improved pricing.
Production Systems
Production Systems revenue of $2.2 billion increased 38% year on year driven by strong activity across all areas led by Europe & Africa and Latin America, which grew 63% and 50%, respectively. North America revenue increased 32% while Middle East & Asia revenue grew 11%.
Production Systems pretax operating margin of 9% expanded 217 bps year on year mainly driven by higher artificial lift, surface, and subsea sales and execution efficiency as supply chain and logistics constraints continued to ease.
Interest and Other Income
Interest & other income consisted of the following:
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(Stated in millions) |
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First Quarter |
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2023 |
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2022 |
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Gain on sale of Liberty shares |
$ |
36 |
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$ |
26 |
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Earnings of equity method investments |
|
39 |
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|
10 |
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Interest income |
|
17 |
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|
14 |
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$ |
92 |
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$ |
50 |
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Earnings of equity method investments for the three months ended March 31, 2023 increased $29 million as compared to the same period of 2022 primarily due to SLB’s share of net income associated with its investment in Liberty Energy Inc. ("Liberty"). SLB recorded its share of Liberty’s net income or loss on a one-quarter lag. During the first quarter of 2023, SLB sold all of its remaining approximately 9 million shares of Liberty.
Other
Research & engineering and General & administrative expenses, as a percentage of Revenue, for the first quarter ended March 31, 2023 and 2022 were as follows:
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First Quarter |
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2023 |
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2022 |
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Research & engineering |
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2.3 |
% |
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|
2.4 |
% |
General & administrative |
|
1.2 |
% |
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|
1.6 |
% |
The effective tax rate for the first quarter of 2023 was 18.7%, compared to 18.4% for the same period of 2022.
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Charges and Credits
On December 31, 2020, SLB contributed its onshore hydraulic fracturing business in the United States and Canada, including its pressure pumping, pumpdown perforating and Permian frac sand business to Liberty in exchange for an equity interest in Liberty. During the first quarter of 2023, SLB sold all of its remaining approximately 9 million shares of Liberty and received net proceeds of $137 million. As a result, SLB recognized a gain of $36 million, which is classified in Interest & other income in the Consolidated Statement of Income.
During the first quarter of 2022, SLB sold 7.2 million of its shares of Liberty and received proceeds of $84 million. As a result, SLB recognized a gain of $26 million, which is classified in Interest & other income in the Consolidated Statement of Income.
Liquidity and Capital Resources
Details of the components of liquidity as well as changes in liquidity are as follows:
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(Stated in millions) |
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Mar. 31, |
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Mar. 31, |
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Dec. 31, |
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Components of Liquidity: |
2023 |
|
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2022 |
|
|
2022 |
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Cash |
$ |
1,501 |
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|
$ |
1,600 |
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|
$ |
1,655 |
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Short-term investments |
|
1,003 |
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|
|
1,049 |
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|
|
1,239 |
|
Short-term borrowings and current portion of long-term debt |
|
(2,140 |
) |
|
|
(923 |
) |
|
|
(1,632 |
) |
Long-term debt |
|
(10,698 |
) |
|
|
(13,163 |
) |
|
|
(10,594 |
) |
Net debt (1) |
$ |
(10,334 |
) |
|
$ |
(11,437 |
) |
|
$ |
(9,332 |
) |
|
|
|
|
|
|
|
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|
Three Months Ended Mar. 31, |
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Changes in Liquidity: |
2023 |
|
|
2022 |
|
Net income |
$ |
944 |
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|
$ |
520 |
|
Depreciation and amortization (2) |
|
563 |
|
|
|
533 |
|
Earnings of equity method investments, less dividends received |
|
(32 |
) |
|
|
6 |
|
Deferred taxes |
|
112 |
|
|
|
(14 |
) |
Stock-based compensation expense |
|
81 |
|
|
|
89 |
|
Increase in working capital |
|
(1,300 |
) |
|
|
(948 |
) |
Other |
|
(38 |
) |
|
|
(55 |
) |
Cash flow from operations |
|
330 |
|
|
|
131 |
|
Capital expenditures |
|
(410 |
) |
|
|
(304 |
) |
APS investments |
|
(133 |
) |
|
|
(168 |
) |
Exploration data costs capitalized |
|
(52 |
) |
|
|
(40 |
) |
Free cash flow (3) |
|
(265 |
) |
|
|
(381 |
) |
Dividends paid |
|
(249 |
) |
|
|
(175 |
) |
Stock repurchase program |
|
(230 |
) |
|
|
- |
|
Proceeds from employee stock plans |
|
121 |
|
|
|
71 |
|
Taxes paid on net settled stock-based compensation awards |
|
(88 |
) |
|
|
(81 |
) |
Business acquisitions and investments, net of cash acquired plus debt assumed |
|
(244 |
) |
|
|
- |
|
Proceeds from sale of Liberty shares |
|
137 |
|
|
|
84 |
|
Other |
|
(84 |
) |
|
|
(24 |
) |
Change in net debt before impact of changes in foreign exchange rates |
|
(902 |
) |
|
|
(506 |
) |
Impact of changes in foreign exchange rates on net debt |
|
(100 |
) |
|
|
125 |
|
Increase in net debt |
|
(1,002 |
) |
|
|
(381 |
) |
Net debt, beginning of period (1) |
|
(9,332 |
) |
|
|
(11,056 |
) |
Net debt, end of period (1) |
$ |
(10,334 |
) |
|
$ |
(11,437 |
) |
(1)“Net debt” represents gross debt less cash and short-term investments. Management believes that Net debt provides useful information regarding the level of SLB’s indebtedness by reflecting cash and investments that could be used to repay debt. Net debt is a non-GAAP financial measure that should be considered in addition to, not as a substitute for or superior to, total debt.
(2)Includes depreciation of fixed assets and amortization of intangible assets, exploration data costs, and APS investments.
(3)“Free cash flow” represents cash flow from operations less capital expenditures, APS investments and exploration data costs capitalized. Management believes that free cash flow is an important liquidity measure for the company and that it is useful to investors and management as a measure of our ability to generate cash. Once business needs and obligations are met, this cash can be used to reinvest in the company for future growth or to return to shareholders through dividend payments or share repurchases. Free cash flow does not represent the residual cash flow available for discretionary expenditures. Free cash flow is a non-GAAP financial measure that should be considered in addition to, not as a substitute for or superior to, cash flow from operations.
Key liquidity events during the first three months of 2023 and 2022 included:
•Capital investments (consisting of capital expenditures, APS investments and exploration data capitalized) were $0.6 billion during the first three months of 2023 compared to $0.5 billion during the first three months of 2022. Capital investments for the full year
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2023 are expected to be approximately $2.5 to $2.6 billion as compared to $2.3 billion for the full year 2022 as SLB continues to support the strong revenue growth that is expected to continue in 2023.
•During the first three months of 2023, SLB sold all of its remaining approximately 9 million shares in Liberty and received proceeds of $137 million.
•As of March 31, 2023, SLB had repurchased $1.3 billion of SLB common stock under its $10 billion share repurchase program. SLB repurchased approximately 4.4 million shares of its common stock under this program during the first quarter of 2023 for a total purchase price of $230 million. SLB did not repurchase any of its common stock during the first quarter of 2022.
As of March 31, 2023, SLB had $2.50 billion of cash and short-term investments on hand and committed debt facility agreements with commercial banks aggregating $6.56 billion, of which $6.00 billion was available and unused. SLB believes these amounts are sufficient to meet future business requirements for at least the next 12 months and beyond.
Borrowings under SLB's commercial paper programs at March 31, 2023 were $559 million.
SLB has a global footprint in more than 100 countries. As of March 31, 2023, only three of those countries individually accounted for greater than 5% of SLB’s net receivable balance. Two of these countries, the United States and Mexico, each represented greater than 10% of such receivables.
Included in Receivables, less allowance for doubtful accounts in the Consolidated Balance Sheet as of March 31, 2023 was approximately $1.2 billion of receivables relating to Mexico. SLB’s receivables from its primary customer in Mexico are not in dispute and SLB has not historically had any material write-offs due to uncollectible accounts receivable relating to this customer.
Additional Information
In March 2022, SLB decided to immediately suspend new investment and technology deployment to its Russia operations. Russia represented approximately 5% of SLB’s worldwide revenue during the first quarter of 2023. The carrying value of SLB’s net assets in Russia was approximately $0.7 billion as of March 31, 2023. This consisted of $0.3 billion of receivables, $0.4 billion of other current assets, $0.3 billion of fixed assets and $0.3 billion of current liabilities.
SLB continues to actively monitor the dynamic situation in Ukraine and applicable laws, sanctions, and trade control restrictions resulting from the conflict. The extent to which SLB’s operations and financial results may be affected by the ongoing conflict in Ukraine will depend on various factors, including the extent and duration of the conflict; the effects of the conflict on regional and global economic and geopolitical conditions; the effect of further laws, sanctions, and trade control restrictions on SLB’s business, the global economy and global supply chains; and the impact of fluctuations in the exchange rate of the ruble. Continuation or escalation of the conflict may also aggravate the risk factors that SLB identified in its Annual Report on Form 10-K for the year ended December 31, 2022, including cybersecurity, regulatory, and reputational risks.
FORWARD-LOOKING STATEMENTS
This first-quarter 2023 Form 10-Q, as well as other statements we make, contains “forward-looking statements” within the meaning of the federal securities laws, which include any statements that are not historical facts. Such statements often contain words such as “expect,” “may,” “can,” “believe,” “predict,” “plan,” “potential,” “projected,” “projections,” “precursor,” “forecast,” “outlook,” “expectations,” “estimate,” “intend,” “anticipate,” “ambition,” “goal,” “target,” “scheduled,” “think,” “should,” “could,” “would,” “will,” “see,” “likely,” and other similar words. Forward-looking statements address matters that are, to varying degrees, uncertain, such as statements about SLB’s financial and performance targets and other forecasts or expectations regarding, or dependent on, its business outlook; growth for SLB as a whole and for each of its Divisions (and for specified business lines, geographic areas or technologies within each Division); oil and natural gas demand and production growth; oil and natural gas prices; forecasts or expectations regarding energy transition and global climate change; improvements in operating procedures and technology; capital expenditures by SLB and the oil and gas industry; the business strategies of SLB, including digital and “fit for basin,” as well as the strategies of SLB’s customers; SLB’s APS projects, joint ventures, and other alliances; SLB’s response to the COVID-19 pandemic and its preparedness for other widespread health emergencies; the impact of the ongoing conflict in Ukraine on global energy supply; access to raw materials; future global economic and geopolitical conditions; future liquidity, including free cash flow; and future results of operations, such as margin levels. These statements are subject to risks and uncertainties, including, but not limited to, changing global economic and geopolitical conditions; changes in exploration and production spending by SLB’s customers and changes in the level of oil and natural gas exploration and development; the results of operations and financial condition of SLB’s customers and suppliers; SLB’s inability to achieve its financial and performance targets and other forecasts and expectations; SLB’s inability to achieve net-zero carbon emissions goals or interim emissions reduction goals; general economic, geopolitical and business conditions in key regions of the world; the ongoing conflict in Ukraine; foreign currency risk; inflation; changes in monetary policy by governments; pricing pressure; weather and seasonal factors; unfavorable effects of health pandemics; availability and cost of raw materials; operational modifications, delays or cancellations; challenges in SLB’s supply chain; production declines; the extent of future charges; SLB’s inability to recognize efficiencies and other intended benefits from its business strategies and initiatives, such as digital or new energy, as well as its cost reduction strategies; changes in government regulations and regulatory requirements, including those related to offshore oil and gas exploration, radioactive sources, explosives, chemicals and climate-related initiatives; the inability of technology to meet new challenges in exploration; the competitiveness of alternative energy sources or product substitutes; and other risks and uncertainties detailed in this Form 10-Q and our most recent Form 10-K and Forms 8-K filed with or furnished to the SEC. If one or more of these or other risks or uncertainties materialize (or the consequences of any such development changes), or should our underlying assumptions prove incorrect, actual results or outcomes may vary materially from those reflected in our forward-looking statements. Forward-looking and other statements in this Form 10-Q regarding our environmental, social, and other
18
sustainability plans and goals are not an indication that these statements are necessarily material to investors or required to be disclosed in our filings with the SEC. In addition, historical, current, and forward-looking environmental, social, and sustainability-related statements may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve, and assumptions that are subject to change in the future. Statements in this Form 10-Q are made as of April 26, 2023, and SLB disclaims any intention or obligation to update publicly or revise such statements, whether as a result of new information, future events or otherwise.