SLB (Schlumberger Limited) — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports fourth-quarter 2011 results. Schlumberger supplies oilfield technology, services and project-management solutions worldwide; reporting is organized around Reservoir Characterization, Drilling, Reservoir Production and Distribution.
Financial performance and position
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $39.54 billion | $27.45 billion |
| Income from continuing operations | $4.79 billion | $4.27 billion |
| Net income attributable to Schlumberger | $5.00 billion | $4.27 billion |
| Diluted EPS, continuing operations | $3.51 | $3.38 |
| Diluted EPS, total net income | $3.67 | $3.38 |
| Cash flow from operations | $6.17 billion | $5.49 billion |
| Capital expenditures | $4.02 billion | $2.91 billion |
| Working capital | $10.00 billion | $7.23 billion |
| Net debt | $4.85 billion | $2.64 billion |
- Revenue rose 44%, reflecting stronger activity and pricing as well as a full year of Smith International revenue; 2010 included only a partial year after the acquisition. Oilfield Services revenue grew 39% to $36.96 billion, and Distribution revenue was $2.58 billion.
- Annual gross margin was $8.12 billion, approximately 20.5% of revenue. Oilfield Services pretax operating margin increased to 19.8% from 19.0%. Reservoir Production margin rose to 20.5%; Reservoir Characterization was 24.7%, and Drilling was 16.0%.
- Net income included a $220 million after-tax gain from the sale of Global Connectivity Services, recorded in discontinued operations. Continuing-operations income is therefore a useful comparison alongside total net income.
- At year-end, cash was $1.71 billion and short-term investments were $3.12 billion; the company also held $256 million of fixed-income investments. Gross debt was approximately $9.93 billion. Unused committed credit facilities were $2.8 billion, and commercial paper outstanding was $0.9 billion.
Fourth quarter
Revenue was $10.97 billion, versus $9.07 billion in fourth-quarter 2010 and $10.23 billion in third-quarter 2011. Net income attributable to Schlumberger was $1.41 billion and diluted EPS was $1.05, compared with $1.04 billion and $0.76 a year earlier. Fourth-quarter 2011 net income included $80 million of after-tax charges, including merger-integration costs and a Libya asset write-off. Oilfield Services revenue increased 8% sequentially, and its pretax operating margin reached 21.1%.
Material changes and management commentary
- All three Oilfield Services groups grew year over year. Drilling revenue increased 73% and Reservoir Production 41%, substantially reflecting the Smith and Geoservices acquisitions; Reservoir Characterization grew 7%. North America Oilfield Services revenue grew 82%, aided by liquid-rich plays, increased service intensity, pricing and utilization.
- The company changed its primary segment reporting in 2011 to product-group segments and reports Distribution separately. Prior segment disclosures were recast, but acquisition timing still affects year-over-year comparability.
- Management planned for 2012 growth, with flexibility amid global economic uncertainty. It expected international rig count to rise about 10% versus 2011 and North American land rig count to remain around fourth-quarter 2011 levels, assuming declining gas activity was offset by liquids-focused activity. Capital expenditures were expected to approach $4.5 billion.
- Management cited exploration spending surveys, offshore activity and demand for higher-value technologies as potential support. It cautioned that forecasts depended on economic conditions, customer spending and geopolitical developments.
Risks, contingencies and unusual items
- Demand and pricing depend materially on oil and gas industry spending, which can weaken with falling prices or slower economic growth. Political unrest disrupted operations in North Africa and the Middle East; Libya operations were shut down for much of 2011.
- The company disclosed ongoing US investigations concerning possible trade-sanctions violations related to certain operations, as well as a separate inquiry involving freight-forwarding and customs services and potential Foreign Corrupt Practices Act issues. Schlumberger said it was cooperating with authorities; outcomes and potential impacts were uncertain.
- Schlumberger faces litigation connected with Deepwater Horizon, though management said the potential loss attributable to M-I SWACO was not expected to be material based on information then known. Offshore regulation, environmental liabilities, safety incidents and hydraulic-fracturing rules could also affect operations and costs.
- Uncertain tax-position liabilities were approximately $1.35 billion, excluding accrued interest and penalties; timing of related cash outflows could not be reliably estimated. Pension plans were 87% funded in the US and 88% funded internationally at year-end, compared with 95% and 92%, respectively, in 2010.
- Other exposures include currency and interest-rate movements, customer payment delays, technology and personnel needs, and possible impairment of multiclient seismic data or acquired assets. The annual goodwill review found no impairment was required.
Important facts for investors to verify
- Separate underlying operating growth from acquisition effects, especially Smith and Geoservices, and compare segment results on the recast reporting basis.
- Assess earnings quality after the $220 million disposal gain and the 2011 charges; also account for the unusually large M-I SWACO acquisition-related gain included in 2010 results.
- Track whether operating cash flow covers the planned capital spending, dividends and repurchases, and monitor the increase in net debt and debt maturities.
- Review outcomes of the sanctions, customs/FCPA inquiries and related legal matters, plus the uncertain-tax-position balance and pension funding needs.
- Test the 2012 growth assumptions against customer spending, regional rig activity, oil and gas prices, geopolitical conditions and offshore regulation.