SLB Limited (Schlumberger Limited) — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Dollar figures are U.S. dollars. The filing describes a severe, industry-wide downturn in oilfield activity, customer spending, and pricing.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $6.520 billion | $10.248 billion | Down 36% |
| Income before taxes | $622 million | $1.294 billion | Down 52% |
| Net income attributable to Schlumberger | $501 million | $975 million | Down 49% |
| Diluted EPS | $0.40 | $0.76 | Down 47% |
| Operating cash flow | $1.210 billion | $1.770 billion | Down 32% |
| Free cash flow, as defined by management | $(103) million | $954 million | Down $1.057 billion |
Pretax operating income was $901 million, down 55% year over year; pretax operating margin was 13.8%, down 563 basis points. Revenue fell 16% sequentially from Q4 2015, and pretax operating margin declined 281 basis points. All three product groups reported lower year-over-year revenue and margins. North America revenue fell 55% year over year, with a pretax operating margin of negative 1%.
Research and engineering expense was $240 million and general and administrative expense was $110 million, both lower in dollars than a year earlier but higher as a share of revenue. Interest expense rose to $133 million from $82 million, principally reflecting debt issuance in Q4 2015. The effective tax rate was 15.9%, versus 23.6% in Q1 2015.
Cash, liquidity, and debt
- At March 31, cash was $2.080 billion, short-term investments $12.352 billion, and held-to-maturity fixed-income investments $401 million.
- Current assets were $27.700 billion and current liabilities $12.880 billion. Cash and short-term investments together were $14.432 billion.
- Long-term debt was $17.233 billion; current portion of long-term debt was $3.267 billion; short-term borrowings were $987 million. Commercial paper borrowings totaled $4.8 billion.
- Operating cash flow was more than offset by capital expenditures ($549 million), SPM investments ($597 million), and capitalized multiclient seismic data ($167 million), producing management-defined negative free cash flow.
- The net-debt table reports $(6.654) billion at quarter-end, compared with $(5.547) billion at year-end. The filing defines net debt as debt less cash and investments, but displays the amount in parentheses; its listed components imply debt exceeded those liquid assets by $6.654 billion. Verify the sign convention when using this measure.
- Committed debt facilities totaled $6.8 billion, of which $2.1 billion was available and unused. Management said liquidity was sufficient for business requirements for at least the next 12 months.
Material changes and unusual items
- There were no restructuring or other charges in Q1 2016. Q1 2015 included $439 million pretax charges: $390 million for workforce reductions and $49 million for Venezuelan currency devaluation. This affects year-over-year comparability.
- Schlumberger repurchased $475 million of shares and paid $629 million in dividends during Q1 2016. The quarterly dividend declared was $0.50 per share. A new $10 billion repurchase authorization was approved, effective after the prior authorization is exhausted.
- On April 1, 2016, after quarter-end, Schlumberger completed its acquisition of Cameron International for approximately $12.9 billion in total consideration, including about $2.8 billion cash and 138 million Schlumberger shares. Cameron’s results are not included in Q1 statements; purchase accounting was incomplete at filing.
Outlook, management commentary, and risks
- Management said the industry was in a “full-scale cash crisis” and expected conditions to deteriorate further in Q2 2016, citing customer budget cuts, pricing pressure, cancellations, delays, and operational disruptions. The filing provides no specific revenue or earnings guidance.
- Full-year 2016 capital expenditures were expected to be approximately $2.0 billion, including about $160 million associated with Cameron, versus $2.4 billion in 2015. Management said future periods could include charges as costs and resources are adjusted to activity levels.
- Schlumberger reported delayed customer payments in Venezuela and announced in April that it would reduce activity to align operations with cash collections. Venezuelan net receivables were approximately $1.2 billion at March 31; Venezuela represented less than 5% of Q1 2016 and 2015 revenue.
- Other disclosed risks include continued E&P spending reductions, pricing erosion, project delays or cancellations, foreign-currency exposure, and risks to Cameron integration and anticipated benefits. Management considered material loss from pending legal proceedings remote, while noting litigation is inherently uncertain.
Key facts for investors to verify
- How the net-debt sign convention should be interpreted, and how debt and cash changed after the Cameron acquisition.
- Whether Q2 activity and pricing deteriorated as management anticipated, and the effect on North America and international margins.
- Collection progress on the $1.2 billion Venezuelan receivable and the financial impact of reduced activity there.
- Cameron purchase accounting, acquisition financing, integration costs, and realized synergies; none are reflected in the Q1 results.
- Cash conversion and investment requirements, given negative Q1 free cash flow alongside dividends and share repurchases.