Business Context and Reporting Period
Company: Schlumberger Limited (Schlumberger N.V.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2002
Business Overview: Schlumberger operates primarily through two reportable segments: Oilfield Services (OFS) and SchlumbergerSema (SLSEMA). The company provides technology and services to the oil and gas industry and offers IT services and smart card solutions.
Key Financial Metrics
All figures in millions unless otherwise noted.
| Metric | Q3 2002 | Q3 2001 | 9 Months 2002 | 9 Months 2001 |
|---|---|---|---|---|
| Operating Revenue | $3,501 | $3,772 | $10,199 | $10,558 |
| Net Income | $173 | $195 | $541 | $337 |
| Diluted EPS | $0.30 | $0.34 | $0.94 | $0.59 |
| Operating Cash Flow (9M) | $1,324 (2002) vs $865 (2001) | |||
| Total Debt (Long-term + Current) | $6,836 (Sept 30, 2002) | |||
| Liquidity (Cash + Investments - Debt) | $(5,532) (Sept 30, 2002) |
Segment Performance (Q3 2002):
- Oilfield Services: Revenue $2,531 million (down 4% YoY); Pretax Income $340 million (down 32% YoY).
- SchlumbergerSema: Revenue $896 million (up 6% YoY); Pretax Income $4 million (down 83% YoY, impacted by charges).
Material Changes vs. Prior Period
- Revenue Decline: Q3 operating revenue decreased 7% year-over-year to $3.5 billion, driven by a 4% decline in Oilfield Services and a 26% drop in North American OFS revenue due to lower rig counts and pricing pressures.
- Net Income Increase (9 Months): Despite lower revenue, net income for the nine months ended Sept 30, 2002, increased 61% to $541 million compared to $337 million in 2001. This was largely due to the elimination of goodwill amortization under new accounting standards (SFAS 142) and significant impairment charges in the prior year.
- Operating Cash Flow: Cash provided by operating activities for the nine months increased significantly to $1.32 billion from $865 million in the prior year, aided by a decrease in receivables.
- Segment Margins: OFS pretax operating income fell 32% in Q3 due to lower pricing in proprietary WesternGeco marine services and losses on seismic contracts in Mexico and India. SchlumbergerSema reported a pretax loss before charges due to a $16 million severance charge.
Guidance, Outlook, and Risks
Management Commentary & Outlook:
- Strategic Review: The company is reviewing the SchlumbergerSema business and preparing a strategic plan, with an independent impairment valuation expected in early December 2002. Further employee severance charges are anticipated in Q4.
- WesternGeco: Due to disappointing Q3 results, the WesternGeco seismic joint venture is reviewing its outlook and expects a Q4 charge to downsize operations.
- Reed-Hycalog Sale: On October 28, 2002, Schlumberger signed an agreement to sell Reed-Hycalog to Grant Prideco, Inc. for $255 million cash and 9.73 million shares. Completion is expected before year-end.
- Market Conditions: Management notes continued uncertainty in the US economy, lower natural gas prices, and a depressed IT services environment. However, growth is observed in international markets (Russia, Caspian, China) and specific technologies like Well Completions & Productivity.
Risks and Contingencies:
- Argentina Exposure: A $29 million non-cash charge was recorded in Q1 2002 related to the economic crisis in Argentina (currency devaluation and contract conversion).
- Legal and Environmental: The company faces various legal proceedings and environmental remediation costs, though management does not expect these to be material to liquidity or financial position.
- Accounting Changes: Adoption of SFAS 142 eliminated goodwill amortization. Adoption of SFAS 146 will change how exit/disposal costs are recognized prospectively.
Investor Verification Checklist
- Reed-Hycalog Transaction: Verify the closing date and final consideration received for the sale of Reed-Hycalog to Grant Prideco.
- Q4 Charges: Monitor the magnitude of the expected impairment valuation for SchlumbergerSema and the downsizing charge for WesternGeco in Q4 2002.
- North American Rig Counts: Track M-I rig count trends in North America, which declined 29% YoY in Q3, as a leading indicator for OFS revenue recovery.
- Liquidity Position: Review the company's liquidity definition (Cash + Investments - Debt), which stood at a negative $5.5 billion, and assess the impact of upcoming debt maturities and commercial paper renewals.
- Argentina Impact: Confirm if there are any further provisions or recoveries related to the Argentina currency crisis beyond the Q1 charge.