SLB LIMITED quarterly report, Q1 FY2018

Business context and reporting period

This is Schlumberger Limited’s unaudited Form 10-Q for the three months ended March 31, 2018, compared with the first quarter of 2017. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. The filing reports oilfield services and products across Reservoir Characterization, Drilling, Production and Cameron.

Financial performance and position

Management reported pretax operating margin of 12%, up 145 basis points year over year. Segment revenue and pretax operating margin were: Reservoir Characterization $1.556 billion and 20%; Drilling $2.126 billion and 14%; Production $2.959 billion and 7%; Cameron $1.310 billion and 13% (approximately flat year over year for Cameron).

At March 31, 2018, cash was $1.865 billion and short-term investments were $2.300 billion. Net debt was $13.947 billion, compared with $13.110 billion at year-end 2017 and $11.396 billion a year earlier. Short-term borrowings and current debt were $4.586 billion; long-term debt was $13.526 billion. Current assets were $18.055 billion and current liabilities $16.195 billion.

Material changes versus the prior comparable period

• Revenue growth was led by Production, up 35% year over year, primarily on North American land activity; Drilling grew 7% and Cameron 7%. Reservoir Characterization revenue fell 4%, mainly due to lower revenue on a Middle East surface-facility project.
• North American revenue increased to $2.835 billion from $1.871 billion; Latin America declined to $870 million from $952 million. Europe/CIS/Africa and Middle East/Asia were broadly similar to the prior year.
• Net income and EPS increased substantially. The prior-year quarter included $82 million of merger and integration charges related to Cameron; no charges or credits were recorded in Q1 2018.
• Operating cash flow declined by $88 million, and free cash flow moved from positive $15 million to negative $152 million. Working-capital investment was $836 million, versus $791 million in Q1 2017.
• Research and engineering expense was $172 million versus $211 million, which management attributed to cost controls. Cost of services and cost of sales rose alongside higher activity.

Outlook, risks and unusual items

• Management expected the U.S. land hydraulic-fracturing market to improve in Q2 2018 in pricing and operational efficiency, and said it was continuing fleet reactivation and recommissioning. Q1 pressure-pumping activity and pricing were weaker than expected versus Q4 2017; rising supply-chain costs and rail-logistics challenges also affected the business.
• Full-year 2018 capital expenditures were expected to be approximately $2.0 billion, compared with $2.1 billion in 2017. Backlog was $2.8 billion, with approximately 50% expected to convert to revenue over the next 12 months; the company cautioned that its business does not have significant backlog.
• Management said $4.2 billion of cash and short-term investments, plus $3.5 billion of unused committed facilities supporting commercial paper, were sufficient for expected business needs for at least 12 months. Commercial paper borrowings were $3.0 billion.
• The adoption of the new revenue-recognition standard on January 1, 2018 had no material financial-statement impact. The company estimated adoption of the lease standard in 2019 would add approximately $1.3 billion of assets and liabilities.
• The 2017 U.S. tax-reform impact included a provisional net charge of $76 million; any further adjustments were expected no later than Q4 2018. Q1’s higher effective tax rate reflected a greater share of pretax earnings in North America.
• Management considered material loss from pending legal proceedings remote, while noting litigation is uncertain. The filing identifies risks including customer spending and activity levels, pricing pressure, foreign exchange, political and economic conditions, operational delays, regulation and technology challenges. Market-risk exposure had not changed materially since year-end 2017.

Important facts for investors to verify

1. Whether North American activity and pricing improvements, particularly in pressure pumping, materialized after Q1 and supported segment margins.
2. Whether working-capital needs and capital investment allow operating cash flow and free cash flow to recover, given negative Q1 free cash flow and increased net debt.
3. Debt maturities, commercial-paper usage and available committed facilities, including the change in current borrowings during the quarter.
4. Whether the expected $2.0 billion 2018 capital expenditure level and backlog conversion assumptions remained on track.
5. Any subsequent adjustments to the provisional tax-reform estimate, and developments in legal, regulatory, foreign-exchange and operational risks.