Business Context and Reporting Period
Company: Schlumberger Limited (SLB)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended March 31, 2009
Business Overview: Schlumberger operates two primary segments: Oilfield Services and WesternGeco. The company provides technology and services for the exploration, development, and production of oil and gas resources in approximately 80 countries.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 | Q4 2008 |
|---|---|---|---|
| Revenue | $6,000 million | $6,290 million | $6,870 million |
| Net Income (Attributable to Schlumberger) | $938 million | $1,338 million | $1,150 million |
| Diluted EPS | $0.78 | $1.09 | N/A |
| Operating Cash Flow | $551 million | $1,130 million | N/A |
| Capital Expenditures | $748 million | $752 million | N/A |
| Cash & Short-term Investments | $4,186 million | $3,153 million | $3,692 million |
| Total Debt | $6,165 million | $5,733 million | $5,291 million |
| Net Debt | ($1,527 million) | ($2,156 million) | ($1,129 million) |
| Effective Tax Rate | 21.1% | 19.1% | N/A |
Note: Negative Net Debt indicates a net cash position (Cash + Investments > Total Debt).
Material Changes vs. Prior Periods
- Revenue Decline: Revenue decreased 5% year-over-year (YoY) and 13% sequentially. The decline was driven by a precipitous drop in North American natural gas rig counts, pricing pressure, and the weakening of local currencies against the US dollar in Europe/CIS/Africa.
- Profitability Compression: Net income attributable to Schlumberger fell 30% YoY. Pretax operating margins for Oilfield Services dropped 371 basis points YoY to 23.1%, while WesternGeco margins fell 19.1 percentage points to 9.9% due to reduced Multiclient revenue.
- Cash Flow Deterioration: Operating cash flow declined 51% YoY to $551 million, primarily due to lower net income and a significant $273 million contribution to pension plans.
- Debt Issuance: Total debt increased by approximately $0.9 billion compared to Q4 2008, largely due to the issuance of €1.0 billion in 4.50% Guaranteed Notes in March 2009 to refinance existing obligations.
Guidance, Outlook, and Risks
- Outlook: Management visibility on 2009 remains unchanged from Q4 2008. A significant recovery in North American gas drilling is not expected before 2010. Overseas, activity declines are expected to be limited, but customers are seeking price relief and deferring exploration expenditures.
- Cost Management: Headcount reductions announced in Q4 2008 are largely complete. Management anticipates further reductions over the coming months to align the cost base with lower activity and pricing levels.
- Capital Expenditures: Full-year 2009 capital expenditures are expected to approach $2.6 billion.
- Share Repurchases: The $8 billion share repurchase program has been temporarily suspended due to the economic environment; no shares were repurchased in Q1 2009.
- Risks:
- Credit Risk: Tightening credit markets and reduced customer cash flows could lead to payment delays or non-payment. Schlumberger noted increased payment delays from one large national oil company customer.
- Market Risk: Exposure to foreign currency fluctuations and commodity price volatility (copper, lead), though hedging strategies are in place.
- Legal: Ongoing cooperation with the US Department of Justice regarding an investigation into freight forwarding services provided by Panalpina, Inc. Management does not expect a material impact on financial position.
Investor Verification Checklist
- Verify the sustainability of the $273 million pension contribution and its impact on future cash flows.
- Monitor the status of the temporarily suspended $8 billion share repurchase program.
- Track the recovery timeline for North American natural gas rig counts and pricing pressure in the US Land and Gulf of Mexico markets.
- Assess the impact of the €1.0 billion Euro note issuance on interest expense and currency hedging effectiveness.
- Review the aging of accounts receivable, specifically regarding the noted delays from the large national oil company customer.