Business Context and Reporting Period
Company: Schlumberger Limited (SLB)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: Schlumberger is the world's leading supplier of technology, integrated project management, and information solutions to the oil and gas industry. Operations are divided into two segments: Schlumberger Oilfield Services (exploration to production services) and WesternGeco (surface seismic services). As of year-end 2008, the company employed approximately 87,000 people across 80 countries.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Total Revenue | $27.16 billion | $23.28 billion |
| Net Income | $5.44 billion | $5.18 billion |
| Diluted EPS | $4.45 | $4.20 |
| Operating Cash Flow | $6.90 billion | $6.29 billion |
| Capital Expenditures | $3.72 billion | $2.93 billion |
| Net Debt | $1.13 billion | $1.86 billion |
| Working Capital | $4.77 billion | $3.55 billion |
| Total Assets | $32.00 billion | $27.85 billion |
Segment Performance (2008):
- Oilfield Services: Revenue of $24.28 billion (up 20%); Pretax income of $6.51 billion (up 9%).
- WesternGeco: Revenue of $2.84 billion (down 4%); Pretax income of $836 million (down 21%).
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenue increased 17% year-over-year, driven primarily by the Oilfield Services segment which saw double-digit growth across all geographic regions (Latin America +28%, Europe/CIS/Africa +24%).
- Profitability: Net income rose 5% despite a 4% decline in WesternGeco revenue. Gross margin decreased to 30.2% in 2008 from 33.5% in 2007 due to pricing pressure in well stimulation services and cost inflation.
- Debt Reduction: Net debt decreased by approximately $728 million to $1.13 billion, aided by strong operating cash flows and the conversion of $448 million in convertible debentures to equity.
- Quarterly Trend: While the full year showed growth, the fourth quarter of 2008 marked a sharp reversal. Oilfield Services revenue declined 2% sequentially, and WesternGeco revenue dropped 33% sequentially due to the global economic downturn and falling oil prices.
Guidance, Outlook, and Risks
Management Commentary & Outlook:
Management expects 2009 activity to weaken across the board, with significant declines anticipated in North American gas drilling, Russian oil production enhancement, and mature offshore basins. Pricing erosion is expected to compound revenue declines. The company is taking early actions to adjust its operating cost base while preserving long-term technology commitments. Capital expenditures for 2009 are expected to approach $3.0 billion.
Key Risks:
- Economic Sensitivity: Demand is heavily dependent on oil and gas industry expenditures, which are sensitive to commodity prices. The global recession and credit crunch have led to reduced customer spending.
- Geographic Exposure: Approximately 78% of revenue is derived from non-U.S. operations, exposing the company to political instability, currency fluctuations, and trade sanctions (e.g., Iran, Syria, Sudan).
- Environmental & Liability: Operations involve hazardous materials and strict environmental regulations; potential liabilities for cleanup or accidents could be material.
- Technology Leadership: Competitive advantage relies on continuous innovation; failure to maintain technology leadership could reduce revenue.
Unusual Items:
In Q4 2008, the company recorded a pretax charge of $116 million, including $74 million for workforce reductions and $32 million for a provision for doubtful accounts related to a client with liquidity issues.
Investor Verification Checklist
- Q4 Momentum: Verify the extent of the sequential revenue decline in Q4 2008 and its impact on 2009 backlog realization ($1.3 billion of the $1.8 billion WesternGeco backlog is expected in 2009).
- Pension Funding: Review the funded status of pension plans; the US qualified plan was 71% funded at year-end 2008 (down from 109% in 2007), with expected contributions of $400-$500 million in 2009.
- Share Repurchases: Confirm the status of the $8 billion share repurchase program; $934 million was repurchased in 2008, but management anticipates significantly lower buybacks in 2009 to preserve financial flexibility.
- Customer Concentration: Note that no single customer exceeded 10% of consolidated revenue, but verify exposure to customers in regions with high political risk or credit deterioration.
- Convertible Debt: Track the remaining $321 million of Series B Convertible Debentures and the potential for further dilution upon conversion.