Schlumberger Limited (Schlumberger N.V.) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unless noted otherwise, amounts are in U.S. dollars and millions. The filing identifies the registrant as Schlumberger Limited; results for one quarter are not necessarily indicative of full-year results.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $7,879 | $7,829 | Up 1% |
| Income before taxes | $509 | $643 | Down 21% |
| Net income attributable to Schlumberger | $421 | $525 | Down 20% |
| Diluted EPS | $0.30 | $0.38 | Down 21% |
| Operating cash flow | $326 | $568 | Down 43% |
| Free cash flow | $(283) | $(152) | More negative |
Services revenue rose to $5,906 from $5,736, while product sales declined to $1,973 from $2,093. The effective tax rate fell to 15.5% from 17.6%, primarily due to geographic mix of earnings. Interest expense was $147, versus $143.
Cash and short-term investments totaled $2,155 at March 31, 2019, compared with $2,777 at year-end 2018. Reported net debt increased to $14,393 from $13,274 at year-end and $13,947 a year earlier. Current liabilities were $11,697. The company had $16,449 of long-term debt and $99 of short-term borrowings/current debt; commercial paper borrowings were $2.7 billion. It reported $3.8 billion of unused capacity under $6.5 billion of committed credit facilities and said liquidity was sufficient for at least the next 12 months.
Operating cash flow was pressured by a $1,048 increase in working capital. Capital expenditures were $413; SPM investments were $151; and capitalized multiclient seismic costs were $45. Dividends paid were $692, and share repurchases were $98. The company issued $1.6 billion of senior notes during the quarter.
Material changes and operating trends
Compared with Q1 2018, pretax income declined despite slightly higher revenue, reflecting weaker results in several segments and higher corporate costs. Segment revenue and pretax income were: Reservoir Characterization $1,543 and $293; Drilling $2,387 and $307; Production $2,890 and $217; and Cameron $1,174 and $137.
- Drilling revenue rose 12% year over year, supported by integrated drilling projects; its pretax margin fell 90 basis points to 13%.
- Cameron revenue fell 10%, principally from lower OneSubsea long-cycle activity; pretax margin declined 102 basis points to 12%.
- Production revenue decreased 2%, mainly due to lower OneStim activity in North America; pretax margin was essentially flat at 8%.
- Reservoir Characterization revenue declined 1%; pretax margin was essentially flat at 19%.
- North America revenue was $2,738 versus $2,835; international revenue was $5,037 versus $4,883. International Reservoir Characterization, Drilling and Production revenue combined grew 8% year over year.
Sequentially, revenue declined 4% from Q4 2018. Management cited expected lower North American land activity, seasonal Northern Hemisphere weakness, reduced software/product and multiclient seismic license sales after a strong Q4, and lower Cameron long-cycle project deliveries. Segment pretax operating income fell to $908 from $967 sequentially.
Outlook, commentary and risks
Management expected international E&P investment to increase 7%–8% in 2019, supported by higher rig counts and project final investment decisions, and expected North America land E&P investment to decline 10%. It described international activity as strengthening and U.S. shale production growth as likely to moderate. These are market and investment expectations, not specific company earnings guidance.
Full-year 2019 capital expenditures were expected to be approximately $1.5–$1.7 billion, versus $2.2 billion in 2018. Management cited demand, oil-market conditions, customer spending, pricing pressure, seasonality, geopolitical and economic conditions, foreign exchange, operational delays or cancellations, regulation, and technology challenges among factors that could affect outcomes.
Legal proceedings were ongoing; management said it considered the probability of a material loss in currently pending matters remote, while noting litigation is uncertain. The filing reported no material changes to the risk factors in the 2018 Form 10-K. Market-risk exposure had not changed materially since year-end. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting.
Unusual/comparability items: Q4 2018 included a $215 million gain on sale of the marine seismic acquisition business and charges of $184 million for workforce reductions and $172 million for impairment. In April 2019, after quarter-end, Schlumberger exchanged specified notes for $1.5 billion of 3.90% notes due 2028 and paid a $48 million premium, substantially in new notes.
Key facts for investors to verify
- Whether working-capital investment and negative free cash flow improve, and how cash generation covers dividends and capital spending.
- Whether net debt stabilizes, including the effects of commercial paper, the April debt exchange, and upcoming maturities.
- Whether international investment and activity develop in line with management’s 7%–8% market-spending outlook, and whether North America land weakness matches its forecast.
- Whether segment margins recover, especially Drilling and Cameron, and how lower OneStim and long-cycle activity affect results.
- How much of the $2.9 billion backlog is converted to revenue; approximately 49% was expected to be recognized within 12 months.
- Potential developments in legal matters, foreign-exchange exposures, and the other stated operational, market and regulatory risks.