SLB Limited (Schlumberger) — Q2 2018 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2018; financial amounts are in millions of U.S. dollars unless noted. Schlumberger provides oilfield services and products through Reservoir Characterization, Drilling, Production and Cameron. Comparisons are with Q2 and the first six months of 2017.
Financial performance
- Revenue: Q2 revenue was $8.303 billion, up 11% year over year; services were $6.141 billion and product sales $2.162 billion. Six-month revenue was $16.131 billion, up 12%.
- Profit: Q2 net income attributable to Schlumberger was $430 million ($0.31 diluted EPS), versus a $74 million loss ($0.05 loss per share) in Q2 2017. Six-month attributable net income was $955 million ($0.69 diluted EPS), versus $205 million ($0.15) in 2017.
- Margins: Q2 pretax operating margin was approximately 13%, essentially flat year over year. For six months, it rose 93 basis points to 13%. Q2 Production margin improved to 10%; Reservoir Characterization rose to 21%, partly because of lower depreciation after prior-year WesternGeco impairments. Drilling and Cameron margins declined to 13% each.
- Cash flow: Six-month operating cash flow was $1.555 billion, versus $1.514 billion. Company-defined free cash flow was $100 million, versus $112 million. Working capital consumed $1.338 billion; capital expenditures were $974 million.
- Debt and liquidity: At June 30, cash and short-term investments totaled $3.049 billion. Short-term debt and current maturities were $3.736 billion and long-term debt was $13.865 billion. Net debt was $14.552 billion, up from $13.110 billion at year-end 2017. The company reported $6.5 billion in committed facilities supporting commercial paper, of which $3.6 billion was unused.
- Shareholder returns: Six-month dividends paid were $1.385 billion; share repurchases were $200 million. Dividends declared were $1.00 per share for the six-month period.
Material changes versus prior periods
- North America drove much of the growth: Q2 North America revenue rose to $3.139 billion from $2.202 billion. International revenue was broadly flat, consistent with a flat rig count, according to management.
- Q2 Production revenue increased 30%, benefiting from stronger North American land activity, added capacity, market-share gains and improved pressure-pumping pricing. Reservoir Characterization revenue fell 7%, while Drilling and Cameron revenue increased 6% and 2%, respectively.
- Q2 2018 included a $184 million pretax ($164 million after-tax) charge for headcount reductions. Q2 2017 included $510 million of impairment and other charges, largely tied to the fair-value adjustment of a Venezuela customer promissory note, and $81 million of merger and integration charges. These unusual prior-year charges materially affect the earnings comparison.
Outlook, risks and unusual items
- Management expected full-year 2018 capital expenditures of approximately $2.0 billion, compared with $2.1 billion in 2017. The filing does not provide a specific full-year revenue or earnings forecast.
- Backlog was $2.5 billion at June 30, with approximately 56% expected to be recognized as revenue over the next 12 months. Management said cash and short-term investments and available committed facilities were sufficient for business requirements for at least 12 months.
- Risks identified include changes in customer exploration and production spending, oil and gas activity, pricing pressure, foreign exchange, geopolitical and economic conditions, regulatory changes, operational delays or cancellations, and technology challenges.
- Management considered material losses from pending legal proceedings remote, while noting litigation outcomes are inherently uncertain. Market-risk exposure was reported as not materially changed since year-end 2017.
- The company estimated adopting the new lease standard in 2019 would add approximately $1.2 billion of assets and liabilities to its balance sheet. Adoption of the new revenue-recognition standard in 2018 had no material financial-statement impact.
Investor facts to verify
- Whether North American activity and pricing gains, particularly in Production, persist and offset flat international activity.
- Whether working-capital investment and capital spending constrain cash generation, given modest six-month free cash flow and rising net debt.
- How much of the reported earnings improvement reflects operating performance versus the absence of the large 2017 charges.
- Whether backlog converts as expected and whether Drilling and Cameron margins recover as new projects mature.
- Updates to the 2018 capital-spending outlook, lease-standard balance-sheet impact, and risks involving customer receivables and international operations.