Schlumberger Limited — 2017 Form 10-K Summary
Business context and reporting period
Schlumberger is a global oilfield technology and services provider, operating through Reservoir Characterization, Drilling, Production and Cameron groups. This annual report covers the fiscal year ended December 31, 2017; quarterly data are also provided for Q4 2017.
Financial performance and position
- Revenue: $30.44 billion, up 9% from $27.81 billion in 2016. Excluding Cameron, acquired April 1, 2016, revenue increased 7%. Growth was led by North America, where revenue rose 42%; international revenue declined 2%.
- Profitability: Schlumberger-attributable net loss was $1.505 billion, or $1.08 per diluted share, compared with a $1.687 billion loss, or $1.24 per share, in 2016. The 2017 result included $3.764 billion of pretax charges and credits. Pretax operating income was $3.921 billion; pretax operating margin expanded to 13% from 12%.
- Q4: Revenue was $8.179 billion; net loss attributable to Schlumberger was $2.255 billion, or $1.63 per diluted share, including $2.923 billion of after-tax charges.
- Segments: Revenue was $6.786 billion in Reservoir Characterization, $8.392 billion in Drilling, $10.639 billion in Production and $5.205 billion in Cameron. Production revenue rose 21%, while Drilling revenue fell 2%. Segment pretax operating margins were 18%, 14%, 9% and 14%, respectively.
- Cash flow: Operating cash flow was $5.663 billion, down from $6.261 billion. Free cash flow, the company’s non-GAAP measure after capital expenditures, SPM investments and multiclient seismic costs, was $1.671 billion versus $2.545 billion.
- Liquidity and debt: Year-end cash and short-term investments totaled $5.089 billion; working capital was $3.215 billion, down from $8.868 billion. Total debt was $18.199 billion, versus $19.616 billion, and net debt was $13.110 billion, versus $10.121 billion. The company reported $3.6 billion of unused committed credit facilities and stated liquidity was sufficient for at least the next 12 months.
- Shareholder returns: Dividends declared were $2.00 per share, unchanged from 2016. Cash dividends paid were $2.778 billion; share repurchases totaled $969 million.
Material changes versus 2016
- Revenue increased primarily because 2017 included a full year of Cameron, compared with nine months in 2016, and because of North American land activity recovery, market-share gains and improved pricing.
- North America land revenue increased more than 80%; the Production Group benefited from higher pressure-pumping activity. International revenue remained weak amid tight E&P budgets and reduced Venezuelan operations.
- Pretax operating margin improved 111 basis points, with gains in Drilling and Production partly offset by declines in Reservoir Characterization and Cameron.
- Cash and short-term investments fell, and net debt rose, despite lower total debt; operating cash flow and free cash flow also declined.
Outlook, commentary, risks and unusual items
- Management expected growth across all operating regions in 2018. Cited third-party surveys projected North American E&P investment growth of 15–20% and international growth of about 5%. These are industry spending expectations, not company revenue guidance. 2018 capital expenditures were expected to be approximately $2.1 billion.
- Management described the oil market as rebalancing and expressed greater optimism, while noting uncertainty around oil prices, OPEC/Russia production policy, shale growth and international investment recovery.
- Schlumberger decided to exit marine and land seismic acquisition, shift WesternGeco to an asset-light model, and monetize its marine seismic fleet after contractual commitments. Related 2017 seismic restructuring charges totaled $1.114 billion.
- Other significant 2017 items included a $938 million Venezuela investment write-down; a $510 million charge associated principally with the Venezuela promissory-note fair-value adjustment and other items; a $245 million loss provision on a long-term construction project; and $308 million of Cameron merger and integration costs. The filing reports total charges and credits of $3.764 billion pretax.
- Venezuela exposure remains material: the company wrote off approximately $469 million of receivables and impaired its promissory notes, whose year-end cost basis was $135 million. It had exchanged $700 million of receivables for three-year notes bearing 6.5% interest.
- The 2017 U.S. tax reform impact was a provisional net charge of $76 million. Management expected the law to reduce the 2018 effective tax rate by approximately 2–3 percentage points, excluding discrete items; the ultimate effect depends on geographic earnings mix.
- Principal risks include cyclical customer spending and oil prices, pricing pressure, international political and currency risks, customer payment delays, regulation of hydraulic fracturing and climate-related activity, environmental and operational liabilities, cybersecurity incidents, and retaining skilled personnel. Management said material loss from pending legal proceedings was remote, while noting litigation outcomes are uncertain.
Important facts for investors to verify
- How much of the revenue and margin improvement reflects sustainable pricing and activity versus Cameron consolidation and North American recovery.
- Whether operating cash flow and free cash flow can recover, and whether dividends and investment plans remain supportable given net debt and working-capital trends.
- The collectibility and ultimate recovery value of Venezuela receivables and promissory notes, and any further exposure there.
- Execution and proceeds from the seismic business exit, including remaining contractual commitments and asset monetization.
- The final tax-reform accounting and the realized 2018 tax rate, along with the delivery of the company’s stated 2018 market outlook.