Schlumberger Limited (Schlumberger N.V.) — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The filing identifies the registrant as Schlumberger N.V. (Schlumberger Limited). Financial amounts below are in U.S. dollars; amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2017 | Comparable period |
|---|---|---|
| Revenue | $7,462 | $7,164 in Q2 2016; up 4% |
| Net income (loss) attributable to Schlumberger | $(74) | $(2,160) in Q2 2016 |
| Diluted EPS | $(0.05) | $(1.56) in Q2 2016 |
| Pretax operating margin | 13% | Up 231 basis points year over year |
For the six months, revenue was $14,356, up 5% from $13,684; net income attributable to Schlumberger was $205, versus a loss of $1,659, and diluted EPS was $0.15 versus a loss of $1.26. The revenue comparison includes six months of Cameron in 2017 but only one quarter in 2016; excluding Cameron, first-half revenue declined 4% year over year.
Q2 revenue growth and margin improvement were led by North American land activity and pricing recovery. Production revenue rose 18% year over year and its margin increased to 9%; Drilling revenue rose 4% and its margin reached 14%. Cameron revenue declined 17%, with margin down 260 basis points to 14%, reflecting lower long-cycle Drilling Systems project volumes and a declining backlog. Reservoir Characterization revenue rose 11%, while its margin was essentially flat at 17%.
Cash flow, liquidity and debt
- Six-month operating cash flow was $1,514, down from $2,842 in the first half of 2016. The company attributed the reduction primarily to delayed receivable collections, activity growth and related working-capital needs.
- Six-month free cash flow, a company-defined non-GAAP measure, was $112 versus $782. It is operating cash flow less capital expenditures, SPM investments and capitalized multiclient seismic costs.
- At June 30, cash and short-term investments totaled $6,218. Current assets were $21,273 and current liabilities were $13,527.
- Total debt was approximately $18,824, including current debt and borrowings; reported net debt was $12,593, up from $10,121 at December 31, 2016. Commercial paper borrowings were $3.0 billion.
- The company reported $3.5 billion of unused committed debt facilities and said available liquidity was sufficient for expected business requirements for at least 12 months.
- First-half dividends paid were $1,393 and share repurchases were $770. Full-year 2017 capital expenditures were expected to be approximately $2.2 billion, compared with $2.1 billion in 2016.
Material changes, unusual items and risks
- Q2 included a $460 million pretax and after-tax fair-value charge after $700 million of Venezuelan receivables were exchanged for a three-year, 6.5% promissory note. An additional $50 million pretax receivables charge related to discussions with another customer. Total Q2 charges and credits, including Cameron integration costs, were $591 million pretax.
- The Venezuelan note had a carrying value of approximately $0.2 billion at quarter-end. Net Venezuelan receivables were approximately $0.5 billion; receivables relating to Ecuador were approximately $1.1 billion. Collection delays and possible deterioration in customer credit remain important risks.
- Q2 2016 included $2.908 billion of impairments, workforce reductions, inventory write-downs and Cameron-related charges. This unusually large prior-year charge substantially affects comparisons of reported earnings.
- The announced OneStim joint venture with Weatherford was expected to close in the second half of 2017, subject to approvals and other conditions. Schlumberger would own 70%, consolidate the venture, contribute specified North American land businesses and pay Weatherford $535 million.
- No specific earnings guidance is provided in the supplied filing text. Management described a North American activity and pricing recovery but also cited international activity and pricing pressure, declining Cameron backlog, customer payment delays, and execution and integration risks. The filing said there were no material changes to previously disclosed risk factors and no material change in market-risk exposure.
- Schlumberger expected to adopt the new lease standard in 2019 and estimated it would add about $1.3 billion of assets and liabilities to the balance sheet. Management did not expect the 2018 revenue-recognition standard to have a material financial-statement impact.
- Management stated that pending legal proceedings were not expected to result in a material loss, while noting litigation is inherently uncertain. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Investor verification priorities
- Track collections, valuation assumptions and subsequent recoveries for the Venezuelan promissory note and receivables, as well as Ecuador receivables.
- Assess whether operating cash flow and free cash flow recover as activity expands, given first-half working-capital pressure and rising net debt.
- Separate underlying operating trends from the large Q2 2017 customer-credit charge and the much larger Q2 2016 impairment and restructuring charges.
- Monitor North American pricing and activity, international market conditions, and Cameron’s long-cycle backlog and margins.
- Verify OneStim closing, required contributions and payment, and whether expected operational benefits materialize; also compare actual 2017 capital spending with the approximately $2.2 billion estimate.