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. If you should require assistance, please press star, then zero, and we will assist you offline. 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.
Thank you, Lea. 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.
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 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 international markets, and an accretive 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. All 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, outperformed 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 challenge.
Operating margins expanded in spite of seasonality effects, improving further beyond pre-pandemic levels. Finally, we generate 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 operationalize our returns-focused strategy, leveraging our new division and basin organization to seize the start of the upcycle. In North America, this resulted in full-year top-line revenue growth, excluding the effects of divestitures and significantly expanded margins, achieving double digits, one of the financial targets we laid out in 2019. Internationally, we also grew the top line and expanded margins 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 result 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 support pricing improvement. In Digital, our second engine of growth, I'm very proud of the momentum we 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 DELFI customers, recorded more than 160% DELFI user growth year-over-year, and saw a more than tenfold increase in compute cycle intensity on our DELFI cloud platform. We also made significant progress in our data, business streaming, and digital operation, advancing our OSDU commercial offerings, autonomous drilling, and the adoption of Agora Edge AI and IOT solutions with great success. The Q4 results, including significant uptake in digital sales and sizable incremental margin, are a clear testament of this success. In Schlumberger New Energy, we will continue to advance the 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, geoenergy, 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. In Celsius, our geoenergy 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 commitment, inclusive of Scope 3 emissions, and launched the transition technology portfolio to focus on the decarbonization of oil and gas operations with much success.
In addition, Schlumberger earned a A 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 these 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 support our success now and well into the future. Above all, I'm most proud of our people, their unique ability to execute, remobilizing operation across the world through numerous pandemic constraints, adapting the logistics and supply chain dynamics and setting new performance benchmarks, all of which earn the recognition of our customers. I would like to thank the entire team for delivering a year of outperformance on every metric.
They surpassed all of our target this year and created excellent 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 multiyear market growth. Tight oil supply and demand growth beyond the pre-pandemic peak are projected to result 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 a period of stronger short-cycle activity resurgence, driven by improved visibility in the demand recovery and greater confidence in the oil price environment.
As oil demand exceeds pre-pandemic levels in 2023 and beyond, long-cycle development will augment capital spending growth in response to the demand-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 have 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 deepwater, are expected to post strong growth, with upside potential as Omicron disruptions dissipate as the year 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 basis points higher than the fourth quarter of 2021. In this context, let me share how 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 a 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.
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 the sale of a portion of our shares 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 & 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 sustain overall margins, 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 & 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 a 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 shares 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 the 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 of 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 billion-$2 billion as compared to just under $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 2009-2014, our 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 a 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 a 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.
Thank you, Stephane. I believe that we are ready to turn the call to you for the questions. Thank you.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press one then zero on your telephone keypad. You will hear acknowledgement that your line has been placed in queue. You may remove yourself by pressing one then zero again. One moment please for the first question. Our first question is from James West with Evercore ISI. Please go ahead.
Hey, good morning, Olivier.
Good morning, James.
Olivier, I liked your increased confidence in achieving mid-cycle margins sooner rather than later. 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 pretty solid target. I'm curious, you know, what are the key drivers around that confidence increase?
No, thank you, James. Let me explain why we have increased confidence. 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. Next, I believe that the current market conditions are clearly supporting our thesis for double-digit CAGR growth over a few years. In this backdrop, I think we believe three or four factors that will help us continue to guide upwards our margin expansion. Firstly, the foundation we have put in place in the last 18 months, the operating leverage reset, the integration performance execution, and the portfolio grading are here to stay.
This was already very visibly impacting the service-oriented division Well Construction and Reservoir Performance as you have seen throughout the year and partially the second half of last year. We saw where this already surpassed the 2018 margins performance. Secondly, I think the market mix is set to improve and resonate to our portfolio strength. Increased offshore activity mix has already started to happen, and we expect this to only accelerate as the year unfolds and further into 2022. The adoption of technology also is accelerating, as you 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 our customer and giving us a premium. Finally, pricing.
Where a year ago, we were talking about green shoots pricing in North America, today we are seeing and we are already recording sign of pricing improvements on a broad market condition, both in North America and also internationally, when we are getting awarded new contract, as well as when we have to mobilize and deliver unique technology to our customer. As the year developed, we believe that these attributes, our foundation, operating leverage, our performance that differentiate on 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. It's not about if, but it's about when.
Right.
We have gained confidence, and we have moved forward our confidence on to this into 2023.
Okay, great. That's very clear, Olivier. Maybe a second question from 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, I guess, the biggest growth? Where could there be some lagging areas? I'd like just a little more color on that cadence would be very helpful.
Maybe in one world, growth will be very broad across all geography, across all division, first as a backdrop. I think that's what we are realizing, and that's quite unique. I think if I had to characterize first geographically or very high level, I think it's possibly a tale of two halves, with North America leading the uptick 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.
Okay.
Secondly, I believe that if I had to characterize what will lead and be accretive to growth, I would say Americas land because of activity uptick, but I will also put offshore environment and Middle East. These are the three engines of growth that will pull this year growth to the target ambition we have put at mid-teens. Now per division, I think the service-oriented divisions of Reservoir Performance and Well Construction will be accretive to this, we expect. Followed by because they are benefiting from this offshore environment, they are benefiting from the pricing, and they have strong both NAM and international presence. They are benefiting from long cycle exposure and technology mix favorable.
In addition, the Production Systems 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 will 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 visibly moderated by a flat-ish environment for APS production going forward. That gives you the mix across the division and across geographies.
That's perfect. Thanks, Olivier.
You're welcome.
Our next question is from David Anderson with Barclays. Please go ahead.
Hi, good morning, Olivier. So you laid out the margin expansion and kind of how you're gonna see that. I guess I have a question on the other side of that, just thinking about mobilization of large tenders. You start up on the Jafurah contract in the Middle East, but you know, I guess typically what we've seen in the past is in these mobilization periods, there's these kind of extra costs that get weighed in. I'm just thinking about how that's looking in 2022. I mean, is that something that you think you're gonna have to absorb in 2022 and that therefore kind of 2023 is sort of another margin uplift there? Or has that improved pricing in some of these contracts kind of countered some of those mobilization?
I think you had said something about getting better pricing for mobilization. If you could just comment on that.
Yeah. I think, Dave, I think it's part of the mix of execution that we have. I think we always mobilize for a new project somewhere in the world.
Mm-hmm.
We are committing to international growth and margin expansion this year. The last quarter was already having witnessed significant new project starts, yet we have marginally improved our margins last quarter, and we have seen the results of the core division. We did it already. I think as we accelerate deployments, yes, we are very critically assessing the cost of this startup. We are working with customers to minimize. We are using digital operations to remotely and optimize our deployment of resources. We believe that what we have done in the last quarter, we'll continue to do in 2022.
I think directionally, we are still set to improve our margin internationally in 2022, despite and building on this new project. We are very, very keen to start all these new projects. We are very proud of the different contract award that we won last year. I think this is part of the mix that we're executing. 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.
Understood. Okay. On the Digital & Integration side, it 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? I was just wondering a second here 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'd be really appreciated.
Yeah. Let me give you a little bit of 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 is 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 touches and expands upon the platform strategy that developed different revenue streams. It's about new DELFI Cloud customer. And you have seen, we have announced, and we have progressed one more time in last quarter. It's about new revenue monetization in digital operation, including Agora, including drilling, remote operation, and automation.
It's about new data business stream where we have been securing contract for OSDU foundation, where we are the first to commercialize enterprise data management solution on this OSDU. It's the follow through on the enterprise contract that we have won in 2021 or in 2020 on DELFI adoption. It relates to the progress we have made in our platform. It relates to the acceleration of digital adoption by our customer and this pursuit of digital transformation by customer. 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. It's diverse, it's broad, and it's here, too, is multifaceted. It's here to continue to expand.
I'm positive on this because it's not a one-off. Obviously, there is a year-end sales effect there that will not repeat in the first quarter. At the same time, it's something that I see expanding as a platform going forward. We are in the early innings of this adoption. As we mentioned a quarter ago, we have 1,700 digital customers. We are in the early innings of deploying and pursuing this large installed base with a digital transformation. It was the first cycle of this digital expansion and digital adoption. I trust this will continue in 2022 and accelerate beyond.
Thank you.
Our next question is from Chase Mulvehill with Bank of America. Please go ahead.
Hey, good morning, everybody.
Good morning, Chase.
Hey, good morning, Olivier. I guess first question is just kind of around, you know, this looming investment cycle that you and I and hopefully investors are starting to realize needs to happen. You know, you had mentioned that you expect a substantial increase in spending, you know, this cycle. Maybe you framed it a little bit, but could you kinda 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? You know, the competitive dynamics have obviously changed, especially, you know, in international, where it feels like you've got more discipline, less players.
Just kind of frame the cycle and activity and where you see the most opportunity for growth, and then ultimately what this could mean for pricing this cycle for OFS companies.
No, thank you. A great question. I think the fundamentals as we see them have not changed, and actually some characteristics of the cycle have accelerated, have been accentuated in the recent months. The first attribute that we put first is the outlook of economic GDP growth that considering the oil intensity and energy intensity will still and will drive the oil demand as a key attribute beyond the previous peak no later than the end of this year, according to the latest projection, and is set to expand visibly beyond not only in 2023 but in a few years beyond this. 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 I almost call it tardiness that we are facing is prompting not only an uplift in the commodity price, but also is prompting the investment return to investment across the broad portfolio of our customers. You have seen it in North America, no surprise. North America is still and will remain structurally smaller than previous cycle due to the capital discipline, but also due to the crunch of supply, including on the service side.
Secondly, I think the international underinvestment for the last few years, actually the last down cycle, combined with the dip in the last two years, is creating conditions for a necessary injection of short cycle capital and then long cycle capital investment to respond to the supply. We are seeing growth in North America, albeit a cut. We are seeing a rebound, a visible rebound in short and long cycle investment internationally. 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 NOCs are investing into their advantaged offshore basins. We are seeing not only infill drilling, but we are seeing FID for offshore that are accelerating going forward.
It's a mix of offshore rebounds, solid, including deepwater, international short cycle and oil capacity onshore, and finally, solid growth in North America. These are unique conditions that are tightening the capacity and that are creating the underlying pricing improvement condition.
Okay, perfect. Appreciate the color. A follow-up to that would be, you know, obviously with this constructive backdrop for Schlumberger and the OFS industry, you've got a wall of free cash flow coming to you. When we look at this, obviously you did $3 billion of free cash flow last year. You know, it looks like over the next two years, you know, that should be growing. How should we think about, you know, returning cash, how Schlumberger is gonna return cash to shareholders? Then how does M&A, you know, fit into this capital allocation strategy? Because obviously you're trying to reshape the company for, you know, new energy ventures and things like that as well.
Hey, Chase, it's Stephane. Look, yeah, I like your expression on free cash flow. It was indeed quite strong last year with $3 billion. Now, indeed, we visibly accelerated the deleveraging of our balance sheet, but we are not quite there yet at the leverage ratio we committed to. 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, with the 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.
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. We will certainly provide a comprehensive framework for future capital allocation as part of the Capital Markets Day that we announced earlier. Returns to shareholders are obviously important, and increased dividends and buybacks will definitely be part of this equation.
Okay, Perfect.
As it relates to M&A, sorry, I didn't answer on M&A. It's also part of what it's of course part of the toolbox, and you'll get more details when we give you that more comprehensive framework again.
Okay. Look forward to it. Appreciate the color. I'll turn it back over.
Thank you.
Thank you.
Next we go to the line of Arun Jayaram with JP Morgan. Please go ahead.
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.
I think what we have seen and we are already witnessing today, I think, and it's visible in Middle East, but beyond, is the short cycle, the return of short cycle activity, to assure, as you said, maintenance of production and with a small but visible increment of output supply. What we are seeing is also a commitment and some FID in the pipeline to increase oil capacity, sustain oil capacity with a few countries committing to participate fully and are laying out the foundation this year and next year into expanding the supply.
What we should not forget about, and it's particularly true for Middle East, is there's also a gas market that is being very sustained that has seen reinvestment, and it's part of the regional dynamic and that is already seeing, is continuing to see double-digit growth. I think it's a combination of gas market being sustained and having had less setback than than oil in the recent time. Short cycle expansion and long cycle acceleration with a new FID capacity, and this is true from deepwater Brazil to the future investment in and the current and future investment in Middle East and FID that are in the pipeline in Russia.
That's again very broad and that combines short and long cycle. If you were to project, I think 2022 is a supply-led activity rebound, and 2023 will be a demand-led activity growth. The capacity expansion, the long cycle will further contribute going forward into 2023.
Great. My follow-up is your outlook on 2022 embeds 200 basis points of year-over-year margin expansions in the fourth quarter. That would, if I did my math right, put your EBITDA margins based on the outlook slightly above 24%. I wanted to talk a little bit.
As we-
Go ahead.
Yeah. As we exit, it's an exit rate. We made a comparison 200 bps or higher as we exit 2022 when compared to the second half or Q4 of 2021.
Exactly.
Just to be clear.
Exactly. Okay. Got it. That's exactly right. So as we think about 2023, your outlook is that you could, you know, reach or exceed a mid-cycle EBITDA margin of 25%.
Second half.
Second half.
Yeah. In the second half.
Great.
We expect in the second half to reach or exceed indeed.
Great. I just wanted to comment on, you know, the drivers of that would be just mix and just further pricing improvement.
I think, again, as I commented in a previous question, I think operating leverage will continue to give us a fall through as we continue to leverage the structure 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 will also contribute to the mix further. Finally, pricing will expand. I think this is the combination that give us more confidence that we reach this mid-cycle prior to previous anticipation.
Great. Thanks a lot.
Thank you.
Our next question is from Scott Gruber with Citigroup. Please go ahead.
Yes, good morning.
Morning, Scott.
Morning. It's clear that your capital intensity is gonna be down, you know, versus last cycle. 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. My question is, can you keep CapEx at a similar level to 2022, you know, as a percentage of sales into 2023 and into 2024, you know, while still riding the multiyear growth cycle that we all hope unfolds?
Look, Scott, our capital intensity has indeed reduced quite a bit and quickly just because we high-graded our portfolio, we extracted more operational efficiencies, and we had our capital stewardship program as well that where we deploy assets only to the best returns countries and contracts. 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 whether we can keep this going into the future? It's a bit too soon to say, but 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. For that matter, we already have a strong pipeline of contracts that allow us to do that at favorable commercial conditions. We'll see how the year progress. For the moment, we're quite confident that the envelope we gave you allow us to fully seize the growth in 2022 and prepare for 2023. We'll see how we set the envelope in 2023. It cannot be a huge increase for sure.
We'll 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 level of a new dynamic and a new mindset in our commercial and contractual engagement with customer. We have the whole organization focused on effectively and efficiently using the CapEx, the equipment pool that we have to deploy to the most accretive contract and the most accretive engagement we have. We'll continue to use this discipline to make sure that we keep in check broadly the capital intensity in this cycle.
Got it. Of the $1.9 billion-$2 billion budget this year, are you able to state how much is APS? If you do end up selling the Canadian project this year, you know, how much, you know, could the APS portion step down on an annualized basis?
Look, you know, we don't disclose the split of the guidance. There is a small increase in APS investment, but it's matched 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. As an aside, we are generating very good cash flows in our APS project. 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, in future years.
Got it. Appreciate the knowledge. Thank you.
Thank you.
Our next question is from Connor Lynagh with Morgan Stanley. Please go ahead.
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's become more broad-based, but are there specific areas globally or specific divisions in which 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, you know, sort of early signs and it's more of a 2023 dynamic?
I think it's broad-based, but let me maybe underline what, where, and how we see pricing conditions getting developed. We see it in three ways. First, we believe that pricing conditions and favorable commercial terms are linked to performance. Performance in execution, performance contracts are differentiated in the impact we provide customers give us the opportunity to negotiate favorable commercial terms and keep or expand our market position with key customers. I think this has started, and this is, depending on region, something that impacts our service division, I would 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 the, on equipment that is tight, be it for offshore deployments or be it for high volume intensity basin like North America. This we have seen when the conditions are set and we are getting an opportunity to expand from green shoots to broad pricing improvement condition. This we have seen happening for the last year in North America, and we see this starting to happen in offshore deployments, where our unique equipment have to be mobilized, have to be secured, and they are done at pricing conditions that have improved over the last few months. Finally, inflation. Inflation is something that exists. It's related to market condition.
Inflation 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 Geo Unit, as we call it, over the years, and we know how to manage it through engagement of customer. It's more acute and it's more pronounced in some part, 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. It's all about performance, including our technology. It's all about capacity tightening, and it's about responding to the inflation pressure. These three things are the lever we are using and that are starting to be more broad, each of them across the different basin.
Hence, it's progressive and it's touching, and addressing different basin and all division throughout 2022 and further into 2023.
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. You know, as we look into 2022, I'd say, you know, the market expectation seems to be that 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?
I think first, as you mentioned, I think inflation is nothing new, and that happened last year. 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. Secondly, I think we have been able to engage commercially to offset and create net pricing condition. I think we see this happening forward. When it comes to resource versus equipment, I think resource is always a hot topic in our organization.
I think we respond to this by further improving, accelerating our digital operation adoption so that we offset some of the pressure on our resource as much as we can and can offset this pressure as well. I think it's part of a toolbox that we use and that we'll continue to tune as the cycle unfolds.
Great. Thanks very much.
Thank you, Connor.
Our next question is from Roger Read with Wells Fargo. Please go ahead.
Yeah, thank you, and good morning.
Good morning.
Certainly good to see things turning around here. I just had a couple questions to follow up on some of the discussions about the expectations on EBITDA margins, the mix that you expect to see. 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 gonna be less. The reason I say that is we know several companies have essentially eliminated their E&A departments, how that might affect, you know, the EBITDA expansion that you anticipate 2022 and on into 2023.
No, 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 sales as part of the... The E&A is, albeit very compressed compared to the peak of the last cycle. I think it is seeing a resurgence for two reasons. First, customers are trying to assess and reassert their reserves near around their hubs, be it on land that they own, or be it on the key offshore hubs that they have developed to make sure they can fast track in filtering and develop near- field exploration.
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. We see that exploration is a 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 a fast track, short cycle return on existing offshore. We see that in Latin America. We see that in Gulf of Mexico, in Europe, in West Africa. This is very broad. We are benefiting from it in our Reservoir Performance.
We are benefiting from it in some of the key technology that we provide, including in digital. I think while it has been a step down compared to previous cycle, there is a keen interest and investment resurgence in E&A for this reason. I think we see that as a backup of FID, and it's through partly offshore.
I appreciate that. Thanks. Just looking at the Digital & Integration segment, it's obviously one a lot of us are focused on, and 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 months, kinda what's been a positive surprise? What's been maybe a little bit of a headwind there? If there's been a headwind, maybe how you would anticipate that, you know, reversing as we look into 2022 and 2023. Probably more from the customer side, but if there's anything internal as well.
No, internally, I think we are very pleased with the progress of deploying and continue to build the digital foundation and digital platform foundation that support our strategy. Every customer has their own pace of adoption, their own internal digital infrastructure they choose to deploy in which we need to plug. 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 these customers to come and join us in our digital journey with our platform. It's we continue to work on it. The last two years could have been better and larger adoption possibly, but I think we have the foundation in place.
We are in the early innings, as I said, of full adoption, considering the size, the oversized scale of our customer base. I remain confident that this is just the first step, and this will only accelerate. We have the right foundation. Digital is here to stay, and digital transformation is here to accelerate across the industry. I think we are taking it one customer at a time, and this is what is happening. We are positive.
Great. Thank you.
Thank you.
Our next question is from Neil Mehta with Goldman Sachs. Please go ahead.
Good morning, team.
Morning.
Morning, Neil.
Morning. The first question is a modeling specific one, working capital obviously a big positive item this quarter. Can you talk about do you see it unwinding over the course of the year, and any just thoughts on trajectory there? As it relates to that, Liberty, it looks like you sold $109 million shares in the quarter. As it relates to that, should we think of that as a ratable exit and at this run rate in the open market, or are you gonna be opportunistic around share price? Thank you.
Thank you, Neil. Working capital indeed was significantly lower in the second half, especially Q4. Again, this was very strong customer collections and customer advances. Looking at 2022, we expect the same pattern, very seasonality in working capital. Usually it increases in the first quarter. We have payment of annual incentives to employees, and then gradually it improves in the subsequent quarters, mostly on cash collection. 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. We'll strive to maintain this to a minimum.
In any case, we still want to generate double-digit free cash flow margins, and that's inclusive of any working capital movement. That helps us manage with 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 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. We'll continue to monitor the value of the investment going forward, and we'll decide on further monetization based on market conditions.
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 wanna achieve out of that day from a financial perspective? What type of framework?
I think we are willing to re-engage with all of you in a live session, first and foremost. We'll want to lay out clearly our strategic framework going forward in the cycle and beyond, including our three engines of growth, Core, Digital and New Energy. We will support it by laying out our financial framework for returning capital, including capital allocation and returns to shareholders. That's what we aim at doing at that time. We'll be clearly expressing in that setting the long-term target that we set.
Perfect. Looking forward to seeing you live.
Indeed. Thank you. I believe we have time for one last question, operator.
Very good. That last question is from Keith Mackey with RBC Capital Markets. Please go ahead.
Hi, good morning.
Morning, Keith.
Yeah, I just wanted to maybe ask you to dig into 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?
Yeah, good question. I think first, the North America outlook we are providing is inclusive of offshore and onshore, and onshore inclusive of U.S. and Canada. I think it's a mix that is a bit not difficult, but it's a bit, a lot of variables at play to decipher here. To your specific question, we foresee indeed that the U.S. land, which is a big portion of this activity outlook, will be having a bias towards well construction as the market is rotating from depleting the DUCs to replenishing the DUCs. Hence, the well construction rig-based activity will be the lead in a 20%+ .
I think we are set to respond to this with our Well Construction portfolio in that environment, and this will be very favorable to us. The offshore environment is broad, and I think offshore environment will be execution of Well Construction and also Reservoir Performance. When you put all this and you put a more modest and more moderate Canadian environment, you have a mix that is favorable to our Well Construction and Production Systems in U.S. lands and favorable to our Reservoir Performance and Well Construction in offshore environment, all of which combine to give us this ambition about 20%.
Perfect. Thanks for that. 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.
We have received several offers for APS asset in Canada as part of the process we launched last year. While we were assessing those proposals, the market conditions actually continued to improve and the value of the asset increased as a result. 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 asset. We are not entertaining those offers at the moment. The asset is now generating very strong cash flows, but we remain open to all options.
Perfect. Thanks very much.
Thank you.
Thank you.
I believe we need to close the call. Before we close the call, I would like to leave you a few takeaways. Firstly, the quality of our results during the fourth quarter, particularly the cash flow generation and our digital sales, have helped us close a remarkable year with financial outperformance during 2021, supporting significant EBITDA margin expansion and very sizable reduction of our net debt. Credit to the entire Schlumberger team for outstanding 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 transition technology, and the successful acceleration of our new energy venture, each developing towards a sizable addressable market.
Thirdly, during 2021, we have enhanced our market position with key customers ahead of the significant upcycle and will fully benefit from the scale and breadth of the favorable activity mix unfolding across all basins during 2022 and beyond. This will result in significant growth and further margin expansion and will support our double-digit free cash flow ambition. Finally, the macro environment is increasingly supportive of a potential super cycle. As this favorable market conditions 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.
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T teleconference service. You may now disconnect.