Business Context and Reporting Period
Company: Schlumberger Limited (Schlumberger N.V.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 1999
Business Segments: Oilfield Services (OFS), Resource Management Services (RMS), and Test & Transactions (T&T).
The reporting period was defined by a major corporate restructuring: the spin-off of the offshore contract drilling business, Sedco Forex, to stockholders on December 30, 1999. Sedco Forex subsequently merged with Transocean Offshore Inc. Schlumberger retained no ownership in the combined entity. Consequently, Sedco Forex results are reported as discontinued operations for all periods presented.
Key Financial Metrics
| Metric (in millions, except per share) | 1999 | 1998 |
|---|---|---|
| Total Operating Revenue | $8,395 | $10,725 |
| Operating Income | $546 | $1,289 |
| Net Income (Continuing Ops) | $329 | $618 |
| Net Income (Total) | $367 | $1,014 |
| Diluted EPS (Total) | $0.65 | $1.81 |
| Cash Flow from Operations | $1,521 | $2,229 |
| Liquidity (Cash + Investments - Debt) | $1,231 | $731 |
| Long-term Debt | $3,183 | $3,285 |
| Working Capital | $5,131 | $4,887 |
Segment Performance (1999 Revenue vs 1998):
- Oilfield Services: $5,869 million (Down 25%)
- Resource Management Services: $1,375 million (Down 6%)
- Test & Transactions: $1,183 million (Down 4%)
Material Changes vs. Prior Period
Revenue and Profit Decline: Consolidated operating revenue fell 22% to $8.395 billion, and operating income dropped 58% to $546 million. This decline was driven primarily by a severe downturn in the global oil and gas exploration and production (E&P) sector, which saw a 22% reduction in average rig count.
Segment Specifics:
- Oilfield Services: Revenue declined 25% and pretax operating income fell 56%. The seismic services industry experienced a severe downturn, impacting all regions. North American revenue fell 28%.
- Resource Management Services: Revenue declined 6% due to price pressure and currency movements (specifically in Brazil and the CIS). Pretax operating income dropped 71%.
- Test & Transactions: Revenue declined 4%. While Smart Cards & Terminals revenue improved 3%, Automated Test Equipment (ATE) revenue decreased 27% due to market uncertainties regarding Rambus memory devices.
Restructuring Charges: The company recorded significant after-tax charges in continuing operations totaling approximately $129 million in 1999. These included $71 million in December related to marine seismic fleet reductions and land drilling restructuring, and $58 million net in March related to global downsizing (partially offset by a gain on the sale of financial instruments).
Guidance, Outlook, and Risks
Management Commentary: Management noted that while activity in North America improved in the third and fourth quarters of 1999, the overall year was characterized by slow activity and reduced E&P spending. The company emphasized its focus on reservoir optimization technology and the successful integration of the Camco acquisition.
Year 2000 Readiness: Schlumberger reported successful transition through the Year 2000 critical dates with no significant disruptions. The program cost was approximately $60 million, largely considered an "opportunity cost" for accelerating product upgrades.
Risks and Contingencies:
- Market Risk: The company is exposed to fluctuations in oil prices and E&P spending levels. A weak US dollar generally increases consolidated revenue but may not materially affect net income.
- Legal Proceedings: The company settled a civil contempt claim with the US Department of Justice regarding a joint venture with Smith International. The company was fined $750,000 for criminal contempt and agreed to a settlement involving $6.34 million in disgorgement.
- Environmental: Accruals exist for environmental remediation of past operations, though management does not expect additional costs to be material.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the exclusion of Sedco Forex results from continuing operations and the treatment of the spin-off in the balance sheet (reduction of retained earnings by $918 million).
- Restructuring Costs: Confirm the cash outflow associated with the $129 million in after-tax charges and the status of severance payments (substantially paid for 1998/1999 charges).
- Debt Structure: Review the increase in interest expense ($56 million increase in 1999) driven by higher debt balances from the 1998 Camco acquisition.
- Segment Margins: Analyze the sharp decline in Resource Management Services operating income (down 71%) relative to its modest revenue decline (down 6%) to understand margin compression drivers.
- Backlog: Note that Oilfield Services has no backlog (service-based), while RMS and T&T had firm backlogs of $417 million and $314 million, respectively, at year-end.