Business context and reporting period
Schlumberger Limited (the filing registrant named in this report) provides oilfield services, products and technology. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017. Unless noted otherwise, amounts are in U.S. dollars.
Financial performance and position
- Third-quarter revenue: $7.905 billion, up 13% from $7.019 billion a year earlier. Services revenue was $5.895 billion; product sales were $2.010 billion.
- Third-quarter earnings: Income before taxes was $677 million versus $200 million; net income attributable to Schlumberger was $545 million versus $176 million. Diluted EPS was $0.39 versus $0.13.
- Nine-month results: Revenue was $22.261 billion versus $20.703 billion. Net income attributable to Schlumberger was $749 million, compared with a $1.482 billion loss in 2016; diluted EPS was $0.54 versus a loss of $1.10. The prior-year comparison includes substantially larger impairment and restructuring charges.
- Margins and segments: Third-quarter pretax operating margin was 13%, up 178 basis points year over year. Production revenue rose 37% and its margin expanded 552 basis points to 10%; Drilling revenue rose 5% and margin reached 14%. Reservoir Characterization revenue rose 6%, but its margin fell 217 basis points to 18%. Cameron revenue declined 3% and its margin fell 110 basis points to 15%.
- Cash flow: Nine-month operating cash flow was $3.412 billion, down from $4.248 billion. Free cash flow, a company-defined non-GAAP measure, was $1.215 billion versus $1.481 billion. The company cited slower receivable collections and working-capital needs from activity growth; a $685 million U.S. federal tax refund partly offset these pressures.
- Liquidity and debt: September 30 cash and short-term investments totaled $4.952 billion. Gross debt was approximately $17.160 billion and net debt was $12.208 billion, compared with $10.121 billion at year-end 2016. The company had $4.2 billion of committed credit facilities available and unused, and said liquidity was sufficient for at least 12 months.
- Capital returns and spending: Nine-month dividends paid were $2.086 billion and share repurchases were $868 million. Full-year 2017 capital expenditures were expected to be approximately $2.1 billion, similar to 2016.
Material changes versus comparable periods
- Third-quarter growth was led by North American land activity, including Production Group pressure pumping; management reported North American land rig count was more than 90% higher year over year.
- Nine-month revenue growth was 8%, but included a full nine months of Cameron in 2017 versus two quarters in 2016. Excluding Cameron, revenue increased 3%.
- Third-quarter 2017 included $49 million of Cameron integration costs. Nine-month 2017 charges totaled $723 million, including a $460 million charge on Venezuelan promissory notes and $213 million of merger and integration costs. Nine-month 2016 charges totaled $3.144 billion, mainly impairment and workforce reduction charges.
- Net debt increased from year-end 2016 as operating cash generation was more than offset by dividends, repurchases and other cash uses. Cash and short-term investments declined from $9.257 billion at December 31, 2016 to $4.952 billion.
Outlook, commentary, risks and unusual items
- Management attributed improved results primarily to recovering North American land activity, higher activity and pricing in Production and Drilling, and continued market share gains in hydraulic fracturing. It noted margin pressure in Testing & Process and lower long-cycle Cameron project volumes.
- Management’s stated 2017 capital expenditure outlook was approximately $2.1 billion. The filing does not provide quantified revenue or earnings guidance.
- Venezuela exposure remains material: net receivables were approximately $0.5 billion, excluding promissory notes. Notes exchanged for $700 million of receivables had a $240 million cost basis and a fair value of $184 million at quarter-end. Management cautioned that worsening political or economic conditions could require further write-downs.
- Receivables related to Ecuador were approximately $1.1 billion; the company reported reaching an agreement in October 2017 to settle overdue receivables. Collection timing and customer credit remain important liquidity risks.
- Planned transactions included the OneStim joint venture with Weatherford, expected to close in fourth-quarter 2017 subject to approvals, and an approximately $1 billion agreement to acquire the Palliser Block in Alberta, announced in October 2017.
- Other risks cited include oil and gas customer spending, pricing pressure, geopolitical and foreign-currency exposure, operational delays, regulatory changes and seasonal factors. Management considered material loss from currently pending legal proceedings remote. No material changes to previously disclosed risk factors were reported.
- Adoption of the new lease standard was expected to add approximately $1.3 billion of assets and liabilities to the balance sheet beginning in 2019. Management expected no material financial statement impact from adopting the new revenue standard in 2018.
Important facts for investors to verify
- Whether the North American activity recovery and pricing improvements continue, and whether they offset margin declines in Reservoir Characterization and Cameron.
- Collections and settlement progress for Venezuela and Ecuador exposures, and any changes in the valuation of the Venezuelan notes.
- Cash conversion, working-capital trends, net debt and the capacity to fund dividends, repurchases and planned investments.
- Completion, terms and financial effects of the OneStim and Palliser transactions.
- The impact of Cameron backlog trends, integration costs and lease-standard adoption on future results and balance-sheet measures.