Business Context and Reporting Period
Company: Schlumberger Limited (Schlumberger N.V.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2006
Business Overview: Schlumberger operates two primary segments: Oilfield Services and WesternGeco. The company provides technology and services for the exploration and production of oil and natural gas. All share and per-share amounts in this report have been restated to reflect a two-for-one stock split approved in January 2006 and distributed in April 2006.
Key Financial Metrics
| Metric | Q1 2006 | Q1 2005 |
|---|---|---|
| Operating Revenue | $4,239 million | $3,159 million |
| Net Income | $723 million | $523 million |
| Diluted EPS | $0.59 | $0.43 |
| Operating Cash Flow | $565 million | $354 million |
| Capital Expenditures | $467 million | $315 million |
| Long-Term Debt | $3,635 million | $3,591 million (Dec 2005) |
| Cash & Short-Term Investments | $3,234 million | $3,040 million (Mar 2005) |
| Net Debt | ($802 million) | ($1,300 million) |
Note: Net Debt is defined by management as gross debt less cash, short-term investments, and fixed income investments held to maturity. A negative value indicates a net cash position.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenue increased 34% year-over-year to $4.24 billion, driven by strong performance in both Oilfield Services (+34%) and WesternGeco (+40%).
- Profitability: Net income rose 38% to $723 million. Pretax income from continuing operations increased 50% to $1.02 billion.
- Segment Performance:
- Oilfield Services: Pretax income surged 70% to $949 million, with margins expanding to 25.6% due to pricing and efficiency.
- WesternGeco: Pretax income jumped 149% to $158 million, reaching a record operating margin of 29.9% driven by record marine vessel utilization (97%) and pricing improvements.
- One-Time Items: Q1 2005 results included a $146 million gain from the sale of a facility in Montrouge, France. Q1 2006 had no such charges or credits, making the year-over-year comparison of operating performance stronger than the headline numbers suggest.
- Accounting Changes: The company adopted SFAS 123R (Share-Based Payment) effective January 1, 2006, resulting in an additional $6 million in stock-based compensation expense for the quarter.
Outlook, Risks, and Unusual Items
- Subsequent Events: On April 20, 2006, Schlumberger agreed to acquire Baker Hughes' 30% minority interest in WesternGeco for $2.4 billion. Approximately 50% will be funded by cash and 50% by credit facilities.
- Capital Allocation: The Board approved a new share buy-back program of up to 40 million shares (split-adjusted) to be executed before April 2010. The previous 15 million share program was completed in Q1 2006.
- Operational Relocation: The company plans to relocate its US corporate offices from New York to Texas and its research center from Ridgefield to Boston in 2006, estimating incremental costs of $25–$30 million.
- Legal Contingencies: The company is in discussions with the US Attorney's office regarding a grand jury subpoena related to visa fraud allegations involving crewmembers on vessels in the Gulf of Mexico. Management believes any potential liability would not be material.
- Risk Factors: Forward-looking statements are subject to risks including global economic conditions, changes in oil and gas exploration spending, and political instability in key operating regions.
Investor Verification Checklist
- WesternGeco Acquisition: Verify the funding structure and impact on leverage ratios following the $2.4 billion acquisition of the remaining WesternGeco stake.
- Stock-Based Compensation: Monitor the impact of the new SFAS 123R standard, which is expected to add approximately $5 million in quarterly expenses for the remainder of 2006.
- Share Repurchases: Track the execution of the new 40 million share buy-back program and its effect on earnings per share.
- Relocation Costs: Confirm the actual costs incurred for the US office and research center relocations against the $25–$30 million estimate.
- Legal Resolution: Follow the status of the visa fraud investigation to ensure no material financial impact arises.