Business Context and Reporting Period
This Form 10-Q covers Schlumberger Limited (SLB) for the quarter and six months ended June 30, 1999. The company operates globally in Oilfield Services, Resource Management Services, and Test & Transactions. The reporting period is characterized by a significant downturn in the oil and gas industry, leading to reduced rig counts and revenue, alongside strategic restructuring efforts including the planned spin-off of its offshore drilling business.
Key Financial Metrics
| Metric | Q2 1999 | Q2 1998 | 6 Months 1999 | 6 Months 1998 |
|---|---|---|---|---|
| Operating Revenue | $2,174 million | $3,084 million | $4,481 million | $6,108 million |
| Net Income | $127 million | $388 million | $216 million | $766 million |
| Diluted EPS | $0.23 | $0.69 | $0.39 | $1.36 |
| Gross Margin | 22% | 28% | 23% (excl. charge) | 28% |
| Cash & Short-term Investments | $4,023 million (as of June 30, 1999) | |||
| Total Debt (Current + Long-term) | $3,829 million (as of June 30, 1999) | |||
| Operating Cash Flow (6 Mo) | $653 million |
Material Changes vs. Prior Period
- Revenue Decline: Operating revenue fell 29% in Q2 and 27% for the six months compared to 1998, driven primarily by a 34% drop in the global rig count.
- Profitability Impact: Net income dropped 67% in Q2. Pretax operating income for Oilfield Services fell 67% in Q2 and 61% for the six months.
- Unusual Items: Q1 1999 results included a net after-tax charge of $90 million ($0.16 per share). This consisted of a $150 million charge for Oilfield Services (severance, vessel lay-up, legal provisions) and a $20 million charge for Resource Management Services, partially offset by an $80 million gain on the sale of financial instruments.
- Segment Performance:
- Oilfield Services: Revenue down 32% (Q2) and 29% (6 months). All geographic regions saw declines.
- Resource Management Services: Revenue down 6% (Q2) and 5% (6 months), impacted by currency effects and weak conditions in South America and CIS.
- Test & Transactions: Revenue down 22% (Q2) and 18% (6 months), largely due to a 50% drop in Automated Test Equipment (ATE) revenue.
- Debt Levels: Interest expense increased significantly ($25 million in Q2, $53 million for six months) due to higher debt balances financing the Camco merger.
Outlook, Risks, and Management Commentary
- Strategic Restructuring: On July 12, 1999, Schlumberger announced a definitive merger agreement to spin off its offshore contract drilling business (Sedco Forex Offshore) and combine it with Transocean Offshore Inc. The transaction is expected to close by December 31, 1999, creating the world's largest offshore drilling company. Schlumberger stockholders will own approximately 52% of the new entity.
- Acquisitions: The company signed a letter of intent to acquire Merak (petroleum software) and acquired Panther Software Corporation to enhance reservoir optimization and seismic data management capabilities.
- Legal Contingencies: The U.S. Department of Justice has challenged the Schlumberger-Smith International joint venture regarding drilling fluids operations, alleging a violation of a 1994 consent decree. Management is vigorously contesting this.
- Year 2000 Readiness: The company estimates total program costs at approximately $60 million. As of July 1999, product/service readiness was over 90% complete, with full readiness expected by September 1999. Management believes costs will not materially impact financial condition.
- Euro Implementation: A Euro Readiness Program is underway. The company does not expect the cost to be material, though the full business impact of the single currency remains under assessment.
- Guidance: The filing does not provide specific numerical guidance for the remainder of 1999, noting that interim results are not necessarily indicative of full-year performance.
Investor Verification Checklist
- Spin-off Valuation: Verify the final terms and closing date of the Sedco Forex/Transocean merger and the exact share exchange ratio for shareholders.
- Legal Exposure: Monitor the status of the DOJ challenge regarding the Smith International joint venture and potential penalties.
- Oil Price Sensitivity: Assess the correlation between current oil prices, rig counts, and the company's ability to recover margins in the Oilfield Services segment.
- Year 2000 Costs: Confirm that actual Year 2000 remediation costs remain within the estimated $60 million budget and do not result in operational disruptions.
- Debt Servicing: Review the impact of increased interest expenses on future cash flows, particularly given the reduced operating income.