Business context and reporting period
This is Schlumberger Limited’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2009. The filing describes two segments: Oilfield Services and WesternGeco. Results reflect a sharp industry slowdown, lower customer spending and pricing pressure; management said the nine-month results are not necessarily indicative of full-year results.
Key financial metrics
Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Revenue | $5,430 | $7,259 | $16,958 | $20,295 |
| Income from continuing operations attributable to Schlumberger | $787 | $1,526 | $2,338 | $4,247 |
| Diluted EPS from continuing operations | $0.65 | $1.25 | $1.93 | $3.46 |
| Cash provided by operating activities | Not stated for quarter | Not stated for quarter | $3,344 | $4,894 |
- Year-on-year revenue fell 25% in Q3 and 16% for the first nine months. Attributable continuing income fell approximately 48% in both comparisons.
- Gross margin was 24.1% in Q3 and 23.2% for the nine months, versus 31.6% and 31.3%, respectively, in 2008. Management attributed the decline primarily to lower activity and pricing pressure, especially in North America.
- Q3 Oilfield Services revenue was $4,953 million, down 22% year over year; pretax operating income was $1,042 million, down 39%, with a 21.0% margin. WesternGeco revenue was $463 million, down 48%; pretax operating income was $61 million, down 83%, with a 13.1% margin.
- At September 30, cash was $194 million and short-term plus held-to-maturity investments totaled approximately $4.66 billion. Total debt was reported at approximately $5.5 billion. The company’s defined Net Debt was $(660) million, indicating net cash of $660 million under that measure.
- Committed bank facilities totaled $3.9 billion, of which $2.8 billion was available and unused. Management said cash and available facilities were sufficient for at least the next 12 months.
- Nine-month capital expenditures were $1.719 billion. Cash dividends paid were $758 million. Operating cash flow declined $1.55 billion year over year, reflecting lower income and substantial pension contributions, partly offset by improved working capital.
Material changes versus comparable periods
- Q3 revenue was approximately $1.83 billion below Q3 2008; continuing income attributable to Schlumberger was $739 million lower. The contraction affected both segments and all major regions, with particularly severe North American activity and pricing declines.
- WesternGeco’s year-on-year revenue and pretax operating income fell more steeply than Oilfield Services, reflecting weaker Marine activity and lower multiclient sales.
- Compared with Q2 2009, total revenue decreased from $5.53 billion to $5.43 billion, while income from continuing operations attributable to Schlumberger increased from $613 million to $787 million. Q2 included $207 million of after-tax charges; there were no charges in Q3.
- Debt increased from year-end 2008, while pension and other postretirement benefit liabilities decreased, including a $361 million reduction from the second-quarter plan curtailment and remeasurement. Short-term investments also rose from year-end.
Outlook, commentary, risks and unusual items
- Management expected a modest North American gas-drilling recovery but no significant service-price improvement in the remainder of 2009. Overseas activity was stabilizing, although seasonality and previously agreed pricing concessions left risk of further small revenue declines. WesternGeco improvement depended on fourth-quarter multiclient sales.
- Management viewed the broader recovery as uncertain and uneven. It expected oversupplied gas markets to keep prices and activity low for some time, with North American service activity and pricing unlikely to improve significantly until late 2010. Stronger oil prices could support spending and modest activity gains, including in deepwater and selected land markets.
- Capital expenditures were expected to approach $2.4 billion for full-year 2009. The share-repurchase program was temporarily suspended; no shares were repurchased during the first nine months of 2009.
- Second-quarter charges totaled $238 million pretax and $207 million after tax: $102 million for workforce reductions and $136 million for postretirement-benefit curtailments. The workforce reductions were linked to reduced oilfield-services activity.
- Customer financial stress and delayed payments could adversely affect collections, results and cash flow. The filing notes that payment delays had occurred in recent quarters.
- Contingencies include U.S. investigations concerning freight-forwarding/customs services and operations in countries subject to U.S. sanctions; the company was cooperating and could not predict the outcomes. In Brazil, an appellate ruling found Schlumberger jointly and severally liable with Transocean for an import-duty assessment of approximately $200 million. Schlumberger was evaluating its options and did not expect any resulting liability to be material to consolidated liquidity or financial position.
- Management reported no material change in market-risk exposure since year-end 2008, no material change in internal control over financial reporting during the quarter, and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether activity and pricing stabilize as management expected, particularly in North America, and whether the anticipated full-year capital expenditure level is maintained.
- Fourth-quarter WesternGeco multiclient sales and the effect of Marine contract rollover and pricing on segment margins.
- Cash conversion, customer payment delays, receivables quality and continued availability of committed credit facilities.
- Debt maturities and refinancing needs, including the $321 million convertible debentures classified as current because holders may require cash repurchase in June 2010.
- Developments in the DOJ inquiries and the Brazilian import-duty litigation, including any change in potential exposure or accounting treatment.
- The effects of the second-quarter workforce actions and benefit-plan changes on recurring costs and future pension obligations.