Schlumberger Limited (SLB) — Q3 2016 Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and nine months ended September 30, 2016. Schlumberger provides oilfield products and services globally. On April 1, 2016, it acquired Cameron International, adding flow equipment, surface and subsea businesses; Cameron’s results are included from the acquisition date.
Key financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $7.019 billion | $8.472 billion | $20.703 billion | $27.731 billion |
| Income (loss) attributable to Schlumberger | $176 million | $989 million | $(1.482) billion | $3.088 billion |
| Diluted earnings (loss) per share | $0.13 | $0.78 | $(1.10) | $2.42 |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $4.248 billion | $6.627 billion |
| Free cash flow | Not separately stated for quarter | Not separately stated for quarter | $1.481 billion | $4.158 billion |
- Q3 revenue fell 17% year over year; excluding Cameron, the decline was 33%. Nine-month revenue declined 25% as reported and 36% excluding Cameron.
- Q3 pretax operating margin fell 634 basis points to 12%, reflecting lower activity and pricing concessions. Segment margins were Reservoir Characterization 19%, Drilling 11%, Production 5%, and Cameron 16%.
- Nine-month results included $3.144 billion of pretax charges ($2.652 billion after tax), including workforce reductions, asset and inventory impairments, and Cameron-related integration and purchase-accounting costs. These charges drove the reported nine-month loss.
- At September 30, cash was $3.441 billion, short-term investments $7.315 billion, and held-to-maturity investments $354 million. Gross debt was approximately $21.3 billion; net debt was approximately $10.2 billion under the company’s measure.
- Nine-month capital expenditures were $1.401 billion, versus $1.783 billion in 2015. Shareholder dividends paid were $1.951 billion; share repurchases were $662 million.
Material changes, outlook and risks
- The oilfield downturn drove substantial declines across legacy segments: Q3 revenue fell 29% in Reservoir Characterization and Production and 37% in Drilling. Management cited E&P budget cuts, lower rig counts, reduced high-margin activity, and pricing pressure.
- Cameron contributed $1.3 billion of Q3 revenue and $2.9 billion for the six months included in 2016 results. The acquisition consideration was approximately $12.8 billion; preliminary purchase accounting recorded $9.2 billion of goodwill. Management cited strong OneSubsea execution, improved manufacturing efficiency, and cost control, while noting a declining project backlog and weaker short-cycle activity.
- Management expected full-year 2016 capital expenditures of approximately $2.0 billion, compared with $2.4 billion in 2015. It said cash and short-term investments of $10.8 billion, plus $3.8 billion of available committed facilities, were sufficient for business needs for at least 12 months.
- Venezuela exposure remains a collection risk: net receivables were approximately $1.2 billion at September 30. The company had reduced activity there to align operations with cash collections; Venezuela represented less than 5% of 2015 revenue.
- Management warned that further industry deterioration could result in additional asset impairments. Other identified risks include customer spending and pricing, geopolitical and currency risks, and the ability to integrate Cameron and realize expected synergies. Management said material loss in pending legal proceedings was remote.
Most important facts for investors to verify
- Whether oilfield activity, customer budgets, rig counts, and pricing are stabilizing, and how reported trends compare excluding Cameron.
- Cash conversion and free cash flow, and the ability to sustain dividends and repurchases while carrying higher post-acquisition debt.
- Progress on Cameron integration, realization of synergies, and final purchase-price allocation and goodwill assumptions.
- Recoverability of impaired assets and inventory, and collection of Venezuela receivables.
- The underlying earnings trajectory after separating recurring operations from the $3.144 billion of nine-month charges.