Schlumberger Limited (SLB) — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. The interim financial statements are unaudited. Amounts below are U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context and results
Schlumberger provides oilfield services through Reservoir Characterization, Drilling and Production groups. In Q2, revenue was $11.182 billion, up 8% year over year and 6% sequentially. International growth and seasonal activity rebounds outweighed essentially flat year-over-year North America revenue.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $11.182bn | $10.341bn | $21.752bn | $20.150bn |
| Income from continuing operations attributable to Schlumberger | $2.219bn | $1.328bn | $3.423bn | $2.556bn |
| Net income attributable to Schlumberger | $2.095bn | $1.403bn | $3.354bn | $2.703bn |
| Diluted EPS, continuing operations | $1.66 | $0.99 | $2.56 | $1.91 |
| Diluted EPS, total | $1.57 | $1.05 | $2.51 | $2.02 |
| Cash flow from operations | Not stated for quarter | Not stated for quarter | $3.428bn | $1.397bn |
Q2 reported pretax income was $2.673 billion, including a net $664 million pretax credit from the OneSubsea gain and investment impairments. The effective tax rate was 16.8%, versus 24.7% a year earlier; excluding Q2 charges and credits, management reported a 23.3% rate.
Margins, segment trends and material changes
- Q2 Oilfield Services pretax operating margin was 20.4%, up 66 basis points year over year and 178 basis points sequentially. International margin rose to 22.0%; North America margin was 19.7%, down 83 basis points year over year amid pricing weakness.
- Q2 segment revenue increased year over year: Reservoir Characterization 11%, Drilling 8% and Production 6%. Reservoir Characterization and Drilling margins improved; Production margin declined 23 basis points year over year to 15.9%, mainly due to North American Well Services pricing pressure and cost inflation.
- For the first six months, revenue rose 8%. International revenue increased 13%, while North America declined 2%; year-to-date Oilfield Services pretax operating margin was 19.5%, flat year over year.
- Q2 discontinued operations recorded a $124 million loss, compared with $75 million income in Q2 2012. The six-month discontinued-operations loss was $69 million, versus $147 million income in 2012.
Cash flow, debt and liquidity
- Six-month operating cash flow was $3.428 billion, compared with $1.397 billion in 2012; management attributed the improvement primarily to a smaller working-capital increase.
- Six-month capital expenditures were $1.800 billion, down from $2.080 billion. Full-year 2013 capital expenditures were expected to be approximately $3.9 billion, compared with $4.7 billion in 2012.
- At June 30, cash was $2.586 billion, short-term investments $3.339 billion and fixed-income investments held to maturity $417 million. Gross debt was approximately $12.0 billion; the company’s net-debt measure was $5.614 billion, compared with $5.111 billion at December 31, 2012.
- Schlumberger reported $5.9 billion of cash and short-term investments, $4.0 billion in committed debt facilities, of which $3.1 billion was available and unused, and $650 million of commercial paper outstanding. Management said liquidity was sufficient for business requirements for at least 12 months.
- Six-month dividends paid were $781 million and share repurchases were $692 million. The company had repurchased $7.8 billion under its prior authorization by June 30; a new $10 billion repurchase program was approved July 18, 2013, to be completed by June 30, 2018.
Significant transactions, outlook and risks
- On June 30, Schlumberger and Cameron formed OneSubsea. Schlumberger contributed its subsea business, paid Cameron $600 million and retained a 40% interest accounted for under the equity method. It recognized a $1.028 billion pretax and after-tax deconsolidation gain, including about $400 million from remeasurement of its retained interest.
- Q2 included $364 million of pretax impairments on two equity-method investments. First-quarter charges included a $92 million loss following Venezuela’s currency devaluation. The filing does not provide a quantified full-year earnings or revenue forecast.
- Management cited improving exploration and drilling activity in several international markets, seasonal rebounds and market-share gains. It also noted North American pricing weakness, project delays in Angola, competitive pressure in pressure pumping and continued delays in collections from a Venezuelan national oil company customer.
- Schlumberger completed the wind-down of its Iran service operations in Q2 and classified the business as discontinued operations. Six-month Iran revenue was $102 million and resulted in a $69 million net loss.
- Risks include global economic and political conditions, customer exploration and production spending, pricing erosion, seasonal and weather effects, operational delays, regulatory changes and technology challenges. The company is cooperating with U.S. authorities in a sanctions-related investigation and said it could not predict the outcome or estimate its impact. M-I SWACO was dismissed from claims consolidated in the Deepwater Horizon multidistrict litigation during Q1 2013. The filing says it is not possible to predict the outcome of other proceedings, though management believed a material loss was remote.
Important facts for investors to verify
- How much of earnings growth reflects recurring operations versus the $1.028 billion OneSubsea gain, impairments and discontinued operations.
- Whether the expected $3.9 billion full-year capital expenditure level and operating cash flow support planned investment, dividends and repurchases.
- Progress on North American pricing and Production margins, and whether international activity and margin gains persist beyond seasonal rebounds.
- Collection timing and exposure related to Venezuela, and any developments in the sanctions investigation and Iran wind-down.
- OneSubsea’s subsequent operating contribution, distributions and valuation; the filing gives the initial transaction accounting but not future performance.